MANILA, Feb 20 (Reuters) - The government and the country's
largest Muslim rebel group have agreed a preliminary deal that
may end a 40-year conflict that has killed more than 120,000 and
displaced 2 million.
President Benigno Aquino hopes this will pave the way for
economic growth and development in the south, a poor region but
one that sits on considerable resources.
Moody's upgraded its ratings of the county in October,
following Standard & Poor's in July, though S&P said further
upgrades depend on Manila raising income levels or sustaining
In 2012, the economy grew 6.6 percent, beating expectations
and putting its rate of expansion second only to China.
Still, much of the country is dilapidated and vulnerable to
natural disaster. Typhoon Bopha killed thousands in the south
late last year, and heavy rains in August swamped huge swathes
of Manila, killing more than 100 people and leaving hundreds of
Internationally, by far the greatest concern is the South
China Sea, contested waters where the U.S.-backed Philippines
are increasingly running up against China.
RATINGS: (Unchanged unless stated:)
MOODY'S: Ba1 (Upgraded from Ba2 on Oct. 29)
Following is a summary of political risks to watch:
Negotiators from the government and the Muslim rebel group
Moro Islamic Liberation Front (MILF) reached a deal on a roadmap
to set up a new autonomous Bangsamoro region in the south of the
mainly Roman Catholic state, signalling an end to a long
Still, the 11,000-member MILF is not the only active rebel
group. Maoist guerrillas have attacked private mining projects
on southern island Mindanao, destroying around $70 million worth
of equipment, and threatening more attacks.
In general, internal security remains weak, persistently
highlighted by foreign embassies in travel advisories, with law
enforcement hobbled by corruption, lack of police resources, and
easy availability of guns on the street.
What to watch:
- Implementation of the political deal to set up an
autonomous region. This will include the demobilisation,
disarmament and reintegration of former Muslim rebel fighters,
imposition of local taxes to cut government subsidies, and
revenue-sharing arrangements with oil and gas producers.
- Any more attacks on mines or other businesses, and how
investors respond. The Philippine army has said it lacks the
resources, so has asked firms to hire private militias to guard
SOUTH CHINA SEA
The Philippines is at the centre of Asia's most likely
military flashpoint: the South China Sea. Last year a regional
summit failed to agree a position on the competing claims of
various nations, and what appears to be the increasing alignment
of Washington with Manila risks infuriating China.
In January the Philippines asked an international tribunal
to intervene in its longstanding dispute with China and declare
that Beijing's claims are invalid, a move China rejected.
That came soon after U.S. and Philippine officials agreed on
an increase in the number of U.S. military ships, aircraft and
troops rotating through the Philippines, though officials from
both countries say there is no plan to revive permanent U.S.
military bases there.
Manila will not surrender claims to its exclusive economic
zone, as defined by the United Nations, but it cannot hope to
confront China militarily.
Beijing wants one-one-negotiations, but Manila and other
claimants prefer a multilateral approach, which opens the way
for an indirect role for the United States. China wants the
United States to stay out of the dispute.
What to watch:
- New security arrangements between Washington and Manila to
increase the U.S. military footprint in the Philippines, the
U.S. fighter jets and warships the Philippines is able to buy,
and how China responds to any Filipino military buildup.
- Any action taken by the tribunal of the United Nations
Convention on the Law of the Sea (UNCLOS) on Manila's request
- Fresh approaches by Manila to pursue its claims on the
disputed Spratly Islands. Aquino has said Manila is looking into
at least five other options to pursue its claims after China
rejected arbitration, including asking for intervention from the
International Tribunal on the Law of the Sea (ITLOS) in Germany.
Commercial activity in the South China Sea. Manila has accepted
exploration bids on two oil and gas in the disputed areas, and
an Anglo-Filipino company may start drilling oil wells later
this year in the Reed Bank, another area claimed by China.
- Spending on upgrades of air and naval equipment, including
radar stations. The Philippines plans to roll out $1.8 billion
in defence spending in the next four years, but says its actions
are not aggressive.
ECONOMIC GROWTH; CHURCH V STATE?
Mining firms want the Philippines to lift an 18-month
moratorium on new projects, but this will not happen until
lawmakers approve new legislation on mineral revenues and a
presidential executive order is signed.
Congressional approval is likely to hold up permits further,
stalling up to $12 billion in new investments planned over the
next five years, including Southeast Asia's biggest undeveloped
copper-gold mine, the $5.9 billion Tampakan project by global
miner Xstrata Plc and Australia's Indophil Resources NL
in the south of the country.
Still, the economy is performing well. With 6.6 percent
growth in 2012, the Philippines is an example of expansion in
contrast to Europe and the United States.
Authorities are struggling to control an inflow of capital
that has pushed up the currency and threatens asset price
bubbles, and government is concerned about the impact of a
strong peso on the competitiveness of its exports and the
growing outsourcing sector.
Separately, Parliament approved in December a highly
controversial reproductive health bill, requiring the government
to hand out contraceptives to poor people, a policy bitterly
opposed by the Catholic church.
The move, the first time in more than a decade an elected
politician has taken on the bishops and won, was a sign of
Aquino's confidence and his bedrock of national support, but is
unlikely to be the last battle between church and state.
What to watch:
- Possible ratings upgrades after the passage of new alcohol
and tobacco sales tax rates. The tax reform measures are likely
to push the Philippines towards investment grade.
- When the mining moratorium is lifted, and how quickly
resources firms start work on new projects.
- Growth figures, and central bank policy moves.
- Political fallout from Aquino's challenge to the
influential Roman Catholic bishops in pushing reform of
(Editing by Daniel Magnowski)