Fitch keeps PH rating, flags overheating risks
Debt watcher Fitch Ratings has affirmed the Philippines’ “BBB” investment grade rating, which carries a stable outlook, but warned of overheating risks to the economy.
“The Philippines’ sovereign ratings balance a favorable growth outlook, government debt levels that are below peer medians, a net external creditor position and policies geared towards maintaining macrostability against lower income per capita and weaker governance and business environment indicators compared with its rating category peers,” Fitch said on Wednesday.
The “BBB” is a notch above minimum investment grade while the “stable” outlook means the rating is likely to remain unchanged within the next 12 to 18 months.
The credit rating agency acknowledged that macroeconomic indicators remained a rating strength for the Philippines notwithstanding overheating risks.
It noted that first quarter gross domestic product (GDP) growth of 6.8 percent was supported by strong investment growth — driven by a pick-up in the public-infrastructure program — and private consumption.
“We expect domestic demand to maintain strong growth of 6.8 percent in both 2019 and 2020, which would maintain the Philippines’ place among the fastest-growing economies in the Asia-Pacific region,” Fitch said.
The Philippines’ estimated five-year average real GDP growth of 6.5 percent at end-2018 will remain far above the current ‘BBB’ median of 3.1 percent, it added.
Overheating
“However, the agency believes the economy faces some overheating risks, evident from a recent rise in inflation, rapid credit growth and a widening trade deficit, although steps taken by the Bangko Sentral ng Pilipinas (BSP) to tighten monetary policy may contain these risks,” it said.
Fitch expects inflation to average about 4.4 percent in 2018, above the central bank’s 2.0-4.0 percent target, due in large part to higher commodity prices and a recent increase in excise taxes associated with a tax reform package implemented at the start of the year.
It emphasized that strong economic activity had contributed to a prolonged period of rapid credit expansion, with system loans up by almost twice the rate of nominal GDP, on average, over the last five years and hitting 16.3 percent year-on-year in May.
“For now, aggregate measures do not indicate severe risks of over-leverage. Banking system credit remains moderate at close to 50 percent of GDP, and though some borrowers are more highly geared than others, we expect growing corporate earnings and income levels to continue to support debt-servicing capacity in general,” the credit watchdog nevertheless said.
External position
Fitch also noted that high foreign exchange reserves continued to act as an important buffer against external shocks.
Reserves continue to cover about seven months of current external payments (CXP) despite having fallen to $77.7 billion by end-June 2018 due to portfolio outflows.
The debt watcher agreed that the BSP’s flexible exchange-rate policy, evident from a depreciation of the peso by about 6 percent against the US dollar over the past year, should prevent a sharp decline in reserves.
“We forecast reserve coverage of CXP to remain at close to seven months in 2019 and 2020 and expect the Philippines to retain its strong net external creditor position,” it said.
Fitch estimates the Philippines’ net external creditor position to be around -11 percent of GDP at end-2018 compared with the equivalent net debtor position of 6.2 percent for the current ‘BBB’ median.
Policies
It also affirmed that the passage of Tax Reform for Acceleration and Inclusion Act last year, which includes the lowering of personal income taxes and higher excise taxes on petroleum, tobacco and automobiles and the introduction of excise taxes on sugar-sweetened beverages and cosmetics, “signals the authorities’ commitment to reform.”
Fitch expects government revenue to improve to 16.2 percent of GDP in 2018 and 16.7 percent in 2019 from 15.6 percent in 2017.
“The revenue improvement should help preserve fiscal stability as government expenditure increases under the planned public-investment program, which aims to raise the government’s capital expenditure to 7.3 percent of GDP by 2022 from 6.1 percent in 2018,” it said.
However, Fitch commented that a Supreme Court ruling requiring increased transfers from the central to local government units “could put upward pressure on the general government debt ratio, as well as creating challenges for effective public-finance management.”
Lastly, it said the Philippines continued to lag peers on some structural metrics such as GDP per capita, standards of human development and governance notwithstanding strong economic growth.
“The Philippines ranks in the 40th percentile on the World Bank’s latest governance indicators compared with the 57th percentile of the current ‘BBB’ median,” it noted.
Affirmation welcomed
Responding to the Fitch statement, Finance Secretary Carlos Dominguez 3rd said: “This is another recognition of the bold economic policy of the Duterte administration to fix the flawed tax system for the first time in over 20 years, and at the same time provide a steady revenue stream for its ‘Build Build Build’ infrastructure development initiative as well as for social programs that would accelerate poverty reduction and grow the middle class.”
Central bank Governor Nestor Espenilla Jr., meanwhile, said the Bangko Sentral ng Pilipinas’ commitment to price stability conducive to a balanced and sustainable economic growth had allowed the country to remain one of the fastest-growing in the region.
“This growth is sustainable under the auspices of the ‘Continuity Plus Plus’ agenda, where we not only build on strong frameworks, methods and buffers already in place but also undertake bold and purposeful financial sector reforms to make the banking and financial system and payments and settlements system more dynamic and truly inclusive,” he added.
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