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By Bettina Faye V. Roc, Sub-Editor


Fitch affirms Philippines’ rating




Posted on March 18, 2015


FITCH RATINGS has affirmed its grade and outlook on the Philippines, keeping the sovereign’s score at the minimum investment grade.

In a statement yesterday, the global debt watcher said it has maintained the country’s long-term foreign-currency issuer default rating (IDR) at “BBB-”.

Similarly, the long-term local-currency IDR was kept at “BBB”.

Fitch also kept its ratings outlook on the Philippines at “stable”, which it said reflects its assessment that “upside” and “downside” risks to the country’s score are “well balanced.”

These scores and the outlook were first issued by the ratings agency in March 2013 and affirmed in the same month last year.

Fitch’s score for the Philippines remains lower than those issued the other two of the so-called “big three” debt watchers, Standard & Poor’s and Moody’s Investors Service, which both upgraded the sovereign’s rating two steps into investment grade last year.

In affirming the country’s credit rating, Fitch cited the country’s strong macroeconomic performance, its favorable external position and the ample liquidity in the financial system.

“The steady inflow of worker remittances and growth of the business process outsourcing industry underpins the country’s economic growth,” the global debt watcher said.

“Fitch forecasts real GDP (gross domestic product) to grow at 6.3% in 2015 and 6.2% in 2016. The Philippines’ five-year real GDP growth was estimated to be 6.3% at the end of 2014, which is far above the ‘BBB’ median of 3.0%,” it noted.

The country’s external finances, Fitch said, are also “a key credit strength.”

“Sustained current account surpluses since 2003 have supported the build-up in FX (foreign exchange) reserves and turned the country into a net external creditor,” it noted.

Credit growth has likewise been supported by the continued expansion of the economy and the abundant supply of cash in the financial system, Fitch said, with the banking system remaining healthy and inflation risks staying low amid a strict regulatory environment.

“This abundance in liquidity has not led to evidence of overheating but it is a risk that bears monitoring over the medium-term,” it said. “The inflation outlook remains close to the central bank’s target range.”

“Fitch also expects that an increase in US interest rates in the near term could ease pressure on domestic liquidity.”

The ratings agency however tagged the country’s public finances as a “neutral” factor, noting the government’s tendency to underspend as well as undershoot revenue goals, even as it continues to pare down its debts.

“Fitch’s assessment balances declining general government debt ratios against limited progress in widening the government revenue base... Sustained fiscal discipline and the propensity of the government to underspend keeps the fiscal deficits low,” it said.

“The Philippines’ revenue and grants at 15.1% of GDP at end-2014 was much lower than the ‘BBB’ median of 28.6% of GDP.”

It also cited persistently “weak” governance standards -- as measured by international organizations -- and low per capita incomes.

TASKS AT HAND
Moving forward, Fitch said that the Philippines must be able to sustain the gains posted over the past few years to be able gain a positive rating action.

It said that the country’s recent showing of strong economic growth should be sustained, but this should also be coupled with improvements in income and development that could put the country at par with its rating range peers, and “without the emergence of imbalances.”

Strengthening governance reforms should also remain a priority, with better standards that would help create a better business climate and support higher domestic and foreign investment also tagged as a positive rating driver.

Fitch added that there should also be “[a] broadening of the general government revenue base that lends stability to the government finances.”

WARNING
At the same time, the credit rating agency warned that “[a] sustained period of overheating that leads to instability in the financial system could be considered credit negative.”

Any sign of deterioration in governance standards or a reversal in reforms set in motion by the Aquino administration could also lead to a negative rating action, Fitch said.

After stellar growth of 6.8% in 2012 and 7.2% in 2013, the Philippine economy’s expansion slowed to 6.1% in 2014, a few points shy of the government’s 6.5-7.5% target.

Crawling farm sector output and lower-than-programmed -- and at times even contracting -- state spending had weighed on GDP growth for much of last year.

This year, the government expects GDP growth to accelerate to 7-8%.