Debt watcher Fitch Ratings on Friday kept the Philippines’ credit rating at the minimum investment grade of BBB-, but raised its outlook from ‘stable’ to ‘positive’, an indication of a probable upgrade within the next 12 to 18 months.
The government, however, said that it believes that the Philippine remains “underrated” by Fitch.
In a statement, the ratings agency said its latest ratings action reflects a series of factors such as the country’s external finances, government debt and deficit levels, average income and level of development, governance standards, economic growth, and liquidity levels.
Fitch said the Philippines’ external finances are a rating strength, noting that the country has been running current-account surpluses since 2003.
“This has been helped by the steady remittance inflow and has led to a build-up in foreign exchange reserves,” it said.
The credit ratings firm also mentioned that government debt and deficit levels in the country have been declining.
With this, Fitch estimates that the fiscal deficit would remain under 2 percent of GDP over 2016 to 2017.
However, the agency continues to view low government revenues, which reduces the sovereign’s ability to contain fiscal balances in the event of a shock, as a weakness in the Philippines’ fiscal profile.
The Philippines’ low average income and level of development is a credit weakness, Fitch said, noting that the Philippines’ GDP per capita in 2015 was $2,860, which is significantly lower than the ‘BBB’ median of $9,253.
“This measure, however, does not capture the significant support to living standards provided by overseas Filipino remittances,” it pointed out.
On a positive note, the debt watchdog said governance standards have continued to strengthen since 2010 under the current administration of President Benigno Aquino 3rd.
“Presidential elections on May 9 will see a change of administration as Mr. Aquino is constitutionally barred from seeking re-election. It remains to be seen whether the next administration will preserve or extend the improvements in this area seen under Mr. Aquino’s stewardship,” it said.
From a macroeconomic standpoint, Fitch said growth performance should remain favorable for the Philippines.
It expects the Philippines’ growth momentum to continue and projects real GDP growth to average about 6.0 percent in 2016-2017.
Meanwhile, liquidity levels in the Philippines’ banking sector are ample, capitalization is strong and loan-loss reserves have risen, it said.
“Active supervision and regulation by a risk-aware central bank, which has progressively strengthened risk management requirements for the banks over the years, have helped to temper the risks from high credit growth,” it said.
The rating, while within the investment-grade scale, is the lowest among scores assigned to the Philippines by a host of credit rating agencies, the Investors Relations Office (IRO) of the Bangko Sentral ng Pilipinas (BSP) said.
It said the Philippines’ credit rating of Baa2 with Moody’s Investors Service, and its BBB rating with Standard & Poor’s, NICE Ratings, and R&I are one notch higher than the rating assigned by Fitch.
The IRO also mentioned that Philippines’ credit rating of BBB+ with Japan Credit Rating Agency is two notches higher than the rating assigned by Fitch.
The agency said the ratings reflect a significant discrepancy in how financial markets actually assess the creditworthiness of the country.
“Financial markets believe the Philippines is much less of a credit risk compared with other countries enjoying higher credit ratings, with spreads on its credit default swap (CDS) being much tighter,” it said.
Credit default swap (CDS) spread on the Philippines’ 5-year bonds stood at 116.35 basis points (bps) on April 7, better than the 264.87 bps for Colombia, 145 bps for Thailand, and 182.34 bps for Mexico, the agency noted.
“Fitch assigns a higher credit rating of BBB to Colombia, and an even higher rating of BBB+ to Thailand and Mexico. The Philippines’ debt burden is also more manageable compared with countries with higher credit ratings,” it said.
The IRO also mentioned that the Philippines’ general government debt as a percentage of GDP settled at 36.8 percent in 2015, better than Colombia’s 44.4 percent, Panama’s 40.6 percent, Mexico’s 44.6 percent, Spain’s 99.1 percent, and Italy’s 133.3 percent.
Panama is rated a notch higher by Fitch at BBB. Mexico, Spain, and Italy are rated two notches higher at BBB+, it noted.
“President Aquino’s commitment to good governance is yet again affirmed. Nonetheless, we believe that we are still underrated by at least a notch. The Philippines continues to outshine similarly rated peer sovereigns amid global volatility. Likewise, we continue to outperform with better fundamentals and robust domestic drivers of growth,” Finance Secretary Cesar Purisima remarked.
Bangko Sentral ng Pilipinas Governor Amando Tetangco Jr. said the Philippines is expected to continue enjoying an inflation environment and a financial system supportive of robust economic growth.
“There are many pockets of policy continuity in government that will help achieve long-term sustainability of the country’s economic gains. The BSP, which enjoys policy independence and fiscal autonomy from the national government as enshrined in law, has put in place sound frameworks for monetary policy and bank supervision,” Tetangco said.
“Guided by these frameworks, and together with its flexibility in adjusting policy settings to deal with modern-day challenges, the BSP will continue to help provide an enabling environment for robust and stable economic growth,” the BSP Governor added.
IRO Executive Director Editha Martin said a credit rating upgrade from Fitch is overdue.
The existing rating of BBB- has been in place since March 2013. Since then, the Philippines’ macroeconomic performance and public finances have improved, and additional governance reforms were put in place, she said.
“A wide range of administrative and legislative measures implemented over the past six years will help institutionalize sound governance and economic policies over the long term,” Martin added.