MALAYSIA-BASED debt watcher RAM Ratings has upgraded the Philippines’ Asean credit rating by a notch in line with the country’s legislative and administrative reforms and ability to withstand external volatilities.
The Philippines’ Asean credit rating was raised to “A1,” or five notches over the minimum investment grade.
RAM also affirmed the Philippine Global credit rating at “BBB3,” which is equivalent to the minimum investment grade.
“The upgrade of the Philippines’ ratings, both on the Asean and Malaysia national rating scales, reflects impressive progress in the enactment of key legislative and administrative reforms as well as the country’s resilience, especially its ability to withstand external volatilities that compares favorably to Asean peers,” the credit watchdog noted.
The Right of Way Act and amendments to the Build Operate Transfer Law should address bottlenecks in infrastructure projects by providing clear and standard guidelines for the acquisition of properties for this purpose, according to RAM.
The Microfinance Non-Government Organization (NGO) Act and the institutionalization of Credit Surety Funds were part of a financial inclusion strategy to bring about more comprehensive growth, it said.
Another positive development is the executive order on the Freedom of Information Bill to strengthen governance standards and promote transparency within the government.
Despite a slower growth in cash remittances, domestic private consumption in the Philippines expanded further given the young demographic profile and growing middleclass, the debt watcher noted. The supply side was mainly been driven by the services sector as a result of a thriving business process outsourcing (BPO) industry.
Such factors prompted RAM to place the gross domestic product (GDP) at 6.5 percent in 2016— within the government’s official target of 6 percent to 7 percent— after the Philippines weathered a bout of financial volatility in 2015 relatively well.
“A robust growth momentum driven by the acceleration of public infrastructure spending and the country’s persistently strong external position anchors its global-scale rating at gBBB3(pi)/Stable, while structural issues such as elevated underemployment and poverty rates remain long-term constraints,” it said.
The credit watchdog noted the Philippines stood at the lowest rung on the Human Development Index (HDI) compared to its gBBB-rated peers.
“Notwithstanding lower unemployment rates, underemployment and poverty rates remained elevated at 18.6 percent and 21.1 percent, respectively, in 2015. Nonetheless, the Philippines has made great strides in improving governance standards and controlling corruption,” it said.
“While the country’s competitiveness and ease of doing business rankings are marginally better, they are still relatively weak as infrastructure and electricity supply shortfalls continue to be long-term constraints,” it added.
The stable outlook is premised on expectations that the new government will continue to work against the backdrop of current macroeconomic policies and make build on the reforms achieved in recent years.
“While the country suffers major infrastructure deficits, the government’s plan to increase infrastructure spending combined with improved efficiency is viewed positively,” it said.
But the risks to policy predictability and implementation delays pose concerns at this juncture as the new administration tries to establish itself, RAM emphasized.
There is a chance that the global rating could be upgraded if the government continues to pursue improvements the growth momentum is cemented with a higher share of domestic and foreign direct investments (FDI).
While the banking sector was fully liberalized in 2014, the long negative list on foreign investments impedes FDI inflows.
With the speed in which the final rules and regulations of the amended Cabotage Law and the new Philippine Competition Law and implemented, the cost of logistics are expected to fall while monopolistic behavior are curbed as an impetus to increased investments, Ram noted.
In view of public-private partnership (PPP) initiative, amendments to the Build-Operate-Transfer Law and the Right of Way Act that was passed into law last February should address infrastructure bottlenecks and further accelerate the implementation of infrastructure projects, RAM said.
As the Philippines is now on a stronger footing, all eyes will be on President Rodrigo Duterte and his administration to deliver their 10-point socioeconomic development agenda to enhance the quality of growth, it said.
On the other hand, the ratings could deteriorate if government finances weaken substantially and surging capital flows due to divergent monetary policies in advanced economies continue to threaten financial stability.
“The reversal of investment initiatives and growth-enhancing strategies, though unlikely, will be viewed negatively,” Ram said.