Debt watcher Fitch Ratings has revised its outlook on the Philippines’ sovereign credit rating to positive from stable, citing a steady improvement in the country’s governance standards and competitiveness.
Fitch Ratings also recognized the economy’s strong growth performance and its ability to confront external headwinds better than most emerging markets.
With the new outlook, the country’s rating of BBB-, which is the minimum investment grade, is likely to be upgraded within the short term, the ratings agency said.
Fitch said better governance under the Aquino Administration had led to the economy’s improved competitiveness, and the country’s favorable demographics should help sustain growth.
“Governance standards and competitiveness indicators, as measured by international organizations, have shown steady improvement through the Aquino administration,” Fitch said in a statement released on Thursday.
It noted that global competitiveness, as ranked by the World Economic Forum, has risen to a level comparable to its ‘BBB’-rated peers.
“Indicators for corruption, transparency and economic freedom have also improved substantially. Evidence that governance improvements can be sustained beyond the next election cycle would be positive for the credit,” it added.
The credit ratings firm said the country’s young population, with a median age of 23.5 years, boosts the economy’s chances of supporting higher productivity in the coming years.
“Economic growth continues to outperform ‘BBB’-rated peers, and favorable demographics support the medium-term growth outlook,” it said.
Fitch also highlighted the economy’s solid fundamentals, which help cushion the impact of outside challenges, such as the growth slowdown in China and market volatility arising from the impending normalization of US policy rates.
It cited the economy’s declining debt burden and robust external position.
General government debt stood at 36.3 percent of gross domestic product in the first quarter of 2015, better than the median of 42.4 percent among economies with a higher credit rating of BBB.
The general government debt has fallen consistently from 65.8 percent in 2004.
The country has posted surpluses in its current account for the past 12 consecutive years, fueled by a steady stream of foreign exchange led by remittances and business process outsourcing revenues.
“Fitch expects the Philippines’ strong external finances will provide resilience against potential shifts in global investor sentiment, for example, following a tightening of US monetary policy,” it said.
Bangko Sentral ng Pilipinas (BSP) Governor Amando Tetangco, Jr. reiterated the view that the economy’s strong fundamentals will help it withstand risk posed by the global economy.
“Sharp market volatility witnessed recently across the globe posed threats of spillover effects on the real sector of economies. What make the Philippines an outperformer are its strong fundamentals, which entice short- and long-term capital once markets see through the temporary noise,” he said.
Tetangco added that the positive outlook from Fitch signals the long overdue credit rating upgrade, which appropriately reflects the economy’s outperformance.
Finance Secretary Cesar Purisima, on the other hand, said the revised credit outlook and the likely credit rating upgrade are a reflection of what financial markets say all along about the Philippines’ creditworthiness.
“The Philippine economy continues to perform strongly despite turbulent headwinds, while financial markets continue to assess Philippine debt way better than what a BBB- rating reflects. We thank Fitch for coming out with a positive outlook. While we still think we are underrated (we continue to outperform our single-A rated neighbors in Southeast Asia), this is definitely a move in the right direction,” he said.
Editha Martin, executive director of the Investor Relations Office (IRO), stressed the need to preserve beyond 2016 the gains in good governance to avoid a deterioration in the country’s much improved creditworthiness.
“Over the past five years, better governance standards in the Philippines have caught the attention of the international community, including assessment institutions, which contributed to the country’s successive credit rating upgrades,” Martin said.
“It is everyone’s responsibility to ensure that good governance is preserved, or even enhanced, beyond the term of the current administration,” she added.
Fitch stated in its report that sustained improvement in governance standards after a change in government in 2016 could lead to a credit rating upgrade, given the positive outlook.
Conversely, Fitch noted that a reversal of reforms could lead to a downgrade of the newly assigned outlook.