Standard & Poor’s Global Ratings maintained its stable outlook for the Philippines’ investment grade rating for now, saying no upgrade may be expected in the next two years and that it may even cut the rating if the government reform agenda stalls.
“The stable outlook balances the Philippines’ lower middle-income economy and diminished policy stability, predictability, and accountability against its strong external position, which features rising foreign exchange reserves and low and declining external debt,” the credit rating agency said in a report released Wednesday.
It said it may consider a rating upgrade for the country if continued fiscal improvements under the new administration boost investment and economic growth prospects, or if improvements in the policy environment lead to a better assessment of institutional and governance effectiveness.
However, it added, “A higher rating is unlikely over our two-year ratings horizon.”
S&P even pointed out, “We may lower the ratings if, under the new administration, the reform agenda stalls or if there is a reversal of the recent gains in the Philippines’ fiscal or external positions.”
Tax reform bill pending in Congress
The government led by President Rodrigo Duterte has launched reform measures intended to strengthen the country’s fiscal, political and economic position for sustainable growth.
A vital element of the reform plan is a comprehensive tax reform program, which was filed in Congress in September last year and remains pending with the House Committee on Ways and Means.
It needs to be in place by mid-2017 or early 2018, the Department of Finance (DoF) has said, warning that otherwise, the administration may consider cutting the infrastructure budget for 2018 which forms basis for the government’s growth projections and welfare programs.
S&P sees slowdown in 2017
The credit rater views the country’s gross domestic product (GDP) growth in line with the Duterte administration’s target range of 6 percent to 7 percent for 2016, adjusting its own estimate upward to 6.6 percent from a previous projection of 6.5 percent for that year.
For 2017, S&P sees a slight easing to 6.4 percent, although that already reflects an upward adjustment from its previous forecast of 6.3 percent. That falls below the official growth target in the range of 6.5 percent to 7.5 percent.
AsiaPac stability faces external risk
The Philippines is among 15 economies with stable outlooks from S&P for their sovereign ratings in Asia-Pacific. Indonesia is the sole sovereign rating in the region with a positive outlook. Five others have negative outlooks as of Jan. 1, 2017.
These economies show sovereign credit trends continuing to be stable over the next year or two, but not without risk from the more mature economies around the world.
“Global economic performance is still weighed down by the lackluster performances of some advanced economies,” S&P Global Ratings credit analyst Kim Eng Tan was quoted in a separate statement issued along with the report.
“Sovereigns also face uncertainties generated by political developments in Europe and the US. These could have negative economic and geopolitical implications for Asia-Pacific,” the analyst said.
The credit watchdog added that political developments in advanced economies are adding to the challenges that Asia-Pacific sovereigns face.
“Anti-globalization sentiments are increasing and the risk of protectionist measures is growing,” Tan said.
“This is a negative development for Asia-Pacific, which has benefited much from global trade and investment flows. The risk may rise further if upcoming elections in Europe produce more surprises,” he added.
“If anti-trade measures become more likely or if the integrity of the European Union is called into question again, financial market volatility could return. And the resulting deterioration in financing conditions for sovereigns in this region could weaken credit metrics even before the trade impact becomes evident,” he added.