Fitch affirms PH investment grade


‘Growth a rating strength for the Philippines’

Debt watcher Fitch Ratings affirmed the Philippines’ “BBB-“ minimum investment grade rating, as well as its positive outlook, but warned it will be watching the impact of the government’s anti-illegal drugs program on the overall economy.

Fitch offered neither an upgrade nor warned of a downgrade, saying only that the rating affirmation recognized the country’s strong growth momentum, robust net external position and low manageable debt levels.

At the same time, it also cited the factors at the other end of the spectrum: relatively weak governance standards, a narrow government revenue base, and below BBB- median levels of per capita income and human development.

“The Philippines’ ratings reflect its continued strong and consistent growth performance, a robust net external creditor position and government debt levels that are lower than the median of peers in the ‘BBB’ rating category,” Fitch said in a statement released late Wednesday.

It added: The ratings remain constrained by relatively weak governance standards, a narrow government revenue base, and levels of per capita income and human development that are below the ‘BBB-’ median.

‘Rating strength’

Fitch pointed out that the Philippines’ “strong economic growth is a rating strength.”

The rating agency expects the economy to sustain its strong growth momentum for gross domestic product (GDP) at 6.8 percent in 2017 from the same level in 2016, and ease only slightly to 6.7 in 2018.

It sees inflation accelerating to 3.3 percent in 2017, up from 1.8 percent at end-2016, but remaining within the central bank’s annual target of 2 percent to 4 percent.

Fitch also pointed out the country’s strong external position with sustained current account surpluses, high levels of international reserves and low and declining external debt.

“The Philippines’ current account has been in surplus since 2003, which has led to a steady increase in its foreign exchange reserves and supports its net external creditor position,” it said.

Fitch expects the current account to move into a modest deficit over 2017-2018 as increased spending on infrastructure is likely to drive strong growth in capital-goods imports.

The Philippines’ current account will, however, remain supported by a steady inflow of remittances, which increased by about 5 percent in 2016, and strong growth in services receipts related to the business process outsourcing industry.

Further, Fitch estimates that foreign-exchange reserves will continue to cover close to eight months of current external payments over 2017 to 2018.

The “Philippines’ net external creditor position and healthy reserve position represent effective buffers against external shocks,” it said.

A strong banking sector metrics was also cited as another factor supporting the Philippines’ credit standing, with banking sector liquidity, capitalization levels and asset quality ratios remaining strong.

‘Effective BSP policy’

Fitch also acknowledged the central bank’s “effective monetary policy stance, given the maintenance of modest inflation levels, and the foreign exchange managed float regime allows the peso to act as a cushion against external shocks.”

The impending transition of the Bangko Sentral ng Pilipinas (BSP) into a new regime under a governor is seen as important in the context of policy stability and credibility.

Improvement in the country’s debt profile has also been observed, even as the government has raised the budget deficit ceiling to provide for an increase in infrastructure spending.

The debt watcher expects the Philippines’ fiscal deficit to widen in 2017 to 2018 to about 3 percent of GDP, consistent with the deficit ceiling set by the government.

Fitch noted broad policy continuity with the Duterte administration’s adoption of a 10-point socio-economic plan.
It also recognized that “political stability has been maintained despite the killings associated with the campaign against illegal drugs.”

“Fitch will continue to monitor the impact of the president’s campaign against drugs on economic performance, financing flexibility and capital flows,” it said.


Pointing out some weak factors, Fitch said the Philippines’ fiscal profile remains constrained by a narrow government revenue base, noting that central government revenues at end-2016 stood at 15.2 percent of GDP although the agency estimates general government revenue at closer to 22 percent of GDP.

“However, this is still below the ‘BBB’ median of 30 percent and the ‘A’ median of 35.5 percent. The authorities plan to address this weakness by implementing an ambitious comprehensive tax reform programme, with the authorities estimating that the first part of this reform package will add revenue of 2 percent of GDP,” it said.

In Fitch’s view, there are execution risks that could affect the extent of the reforms and their implementation.

The credit rating agency said average income levels and standards of human development in the country continue to lag those of many of its peers in the ‘BBB’ rating category.

“The Philippines’ per capita income level at market exchange rates at end-2016 was US$2,968, compared with the ‘BBB’ median of US$9,654. Further, on the United Nations Human Development Index, Philippines is ranked in the 39th percentile while the ‘BBB’ median was the 68th percentile,” it said.

Earlier, global lender and investment bank Deutsche Bank said the current administration’s loose fiscal stance and sustained revenue shortfalls might prompt revisions to the country’s credit ratings.

Deutsche Bank had pointed out that given its loose fiscal stance, the government would face market scrutiny over its ability to shore up revenues this year even before the tax reforms kick in, and to keep the deficit within the 3 percent-of-GDP ceiling.

The bank estimated that if the deficit rose further to 4 percent of GDP in 2018 to 2019 because of revenue shortfalls, the national government debt would climb 5 percentage points (ppts) toward 50 percent of GDP five years later.

The debt-to-GDP ratio is an indicator used by credit rating agencies such as Fitch Ratings, Moody’s Investors Service and Standard and Poor’s (S&P) Global Ratings to assess the creditworthiness of sovereigns.


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