Tuesday, February 28, 2017

Credit rating intact despite mining woes

Posted on February 21, 2017

THE PHILIPPINES’ credit rating is unlikely to take a beating from the government’s crackdown on miners deemed erring, according to an analyst at Moody’s Investors Service who nevertheless warned of a possible collapse in much-needed revenues and foreign investments in the already “underperforming” sector.

Christian de Guzman, senior credit officer at Moody’s, said the shutdown of more than half of the country’s 41 operational mines and the cancellation of 75 other mining contracts “do not” affect the Philippines’ credit rating so far, but flagged that such developments could dampen investor appetite towards the country.

“We have to look at mining operations in the context of the larger Philippine economy: it’s relatively small,” Mr. de Guzman said in a telephone interview yesterday, while acknowledging that “this is a negative development with regard to the mining sector.”

“The potential impact on fiscal revenues [is what] we have always pointed out as a weakness in the Philippines’ sovereign credit rating profile. The impact [of the mine crackdown on overall revenue collections] is still relatively minor.”

The Philippines currently holds a Baa2 rating with a “stable” outlook from Moody’s -- a notch above minimum investment grade -- keeping borrowing costs lower.

Moody’s has repeatedly stressed the need for “continued improvement” in revenue collections by the government in order to support the state’s ambitious spending plans and maintain the country’s credit rating.

Environment Secretary Regina Paz “Gina” L. Lopez on Feb. 2 announced the closure of more than half of the country’s metal 41 mines and suspension of operations in five other sites on environmental grounds. She followed that up last week by announcing that she was also cancelling contracts for 75 other projects in pre-operation stage for being located in watersheds.

According to the Environment department, the mines to be shuttered and those to be suspended accounted for 40.971% of industry jobs in 2015, as well as 41.425% of taxes collected and 22.463% of investments that same year.

Initial estimates made by the Finance department showed that Ms. Lopez’s mining crackdown will cost P821 million in annual taxes paid to local governments of areas where affected mines are located.

Mr. de Guzman further said that these developments are likely to discourage additional mining investments which, to be sure, have been in the doldrums since 2011 when the administration of former president Benigno S. C. Aquino III imposed a moratorium on new projects that was extended indefinitely by Executive Order No. 79 issued in July the following year.

“[W]e have to take a step back and look at the history of the mining industry in the Philippines. This sector has always been fraught with irregularities. I don’t think the perception of policy uncertainty that seems to have cropped up under the Duterte administration isn’t really anything new, it’s always been there,” the Moody’s analyst said.

“I do think this is negative for further investment to the mining sector.”

Mr. de Guzman noted further that “[i]nvestment in the sector has always underperformed its potential.”

“We all know that the mineral resource endowment is there and, for some reason or another, that has not been exploited to the degree that it could have been,” he added.

“This has contributed to the weakness in revenue, and also growth.”

Moody’s expects the Philippine economy to expand by 6.5% this year, coming from 2016’s 6.8% average growth. This matches the low end of the government’s 6.5-7.5% growth goal for 2017.

The mining industry contributed to 0.5% to the country’s jobs and 0.6% to gross domestic product in the first three quarters of 2016, according to the Mines and Geosciences Bureau.

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