Factbox: Key political risks to watch in the Philippines
MANILA, Philippines - President Benigno Aquino is trying to lure investors to the Philippines, but has troubles at home: in late October, rumors of an Army plot to overthrown him surfaced, even as he wrestles with violent Muslim rebels and a worsening security situation.
Aquino is also trying to deal with perennial problems such as corruption and creaking infrastructure, as Manila tries to press its claims in the contested South China Sea, and manage its changing relationships with China and the United States.
Ratings
S&P: BB
MOODY'S: Ba2
FITCH: BB+
The cost of insuring against default on 5-year sovereign debt fell in October after rising to its highest in nearly 2-1/2 years in September due to market turmoil over a darkening global outlook and Europe's debt woes.
Following is a summary of political risks to watch:
Internal security
Internal security remains a weak spot, 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.
In mid-October, Deadly fighting between Philippine soldiers and a group of Muslim separatists on a southern island forced thousands of people to flee their homes and created a new problem for stalled peace talks to end the long-running insurgency.
Aquino held talks with the Moro Islamic Liberation Front's (MILF) leader in Tokyo in August to accelerate the peace process, but the momentum appeared to have stalled after the separatists rejected Manila's proposal to end the conflict.
MILF is not the only active rebel group. Earlier in October, around 200 Maoist guerillas attacked three private mining projects on southern island Mindanao, destroying around $70 million worth of equipment, and threatening more attacks.
What to watch:
-- The Army's patience with the peace process, and with Aquino. Coup attempts have happened in the Philippines before, and some within the army are angry with Aquino for not taking a tougher line with MILF.
-- 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 their businesses.
-- The Maoists are refusing to return to talks until some prisoners are released, and they continue to attack government forces. The sincerity of the Maoists in seeking peace has been doubted by analysts.
South China Sea/West Philippine Sea
Tensions have eased since the middle of the year, after a number of incidents with Chinese ships in waters claimed by both countries off the Philippine coast. But the issue of sovereignty, and therefore ownership of the minerals and gas beneath the seabed, remains unresolved.
Manila will not surrender claims to its exclusive economic zone, as defined by the United Nations, but it cannot hope to confront China militarily, and is wary of spoiling relations with the region's superpower.
China bases its claims on historical sovereignty, and has rejected Manila's request for U.N. arbitration.
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.
In October, the Philippines and Vietnam agreed to expand non-military cooperation of their maritime forces in the South China Sea, avoiding a formal military pact that would have irked China.
What to watch:
-- Fresh approaches by Manila to pursue its claims on the disputed Spratly Islands. Aquino told Reuters in September that Manila was looking into at least five other options to pursue its claims after China rejected arbitration.
-- How the issue is handled at the East Asia forum in Indonesia in November, which China and the United States will both attend.
-- Spending on upgrades of air and naval equipment, including radar stations. The Philippines says it needs to build a basic defence capability, and its actions are in no way aggressive.
Political, economic challenges
Aquino remains immensely popular with voters, and his administration seems to have regained momentum after a lull in the first half of 2011 when he was criticized for a lack of drive.
The government's strength has been economic management, including reducing the budget deficit by improving revenue collection and controlling spending, but the worsening outlook for the global economy is hitting the Philippines.
Though Fitch in June raised its rating on the Philippines to just one notch below investment grade, an investment grade rating requires a stronger revenue base, including new and/or higher taxes.
The government says this is not on the agenda this year, and its main tax agency said last month that it missed its revenue goals for the first nine months of the year by 1 percent.
In October, the government said it expects growth this year to be between 4.5 to 5.5 percent, lower than a 5-6 percent growth target under its budget assumptions for the year, it said in October.
What to watch:
-- Any more growth forecast reductions, and central bank policy moves.
-- Foreign and domestic investors' interest in big infrastructure projects. A centerpiece policy of Aquino, the launch has been repeatedly delayed and in that time the global investment environment has soured.
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