Top Story

By Bettina Faye V. Roc, Senior Reporter

Investment-grade rating, outlook affirmed by Fitch

Posted on March 26, 2014

FITCH RATINGS has affirmed its investment grade score and outlook for the Philippines, noting that the country continues to be buoyed by strong economic growth, improving finances and governance reforms.

The debt watcher, the first to raise the Philippines to investment grade in March last year, yesterday upheld its ‘BBB-’ sovereign rating. A "stable" outlook was also retained.

The move, Fitch said, reflects the Philippine economy’s continued strength, which has translated into stable consumer prices, improved government finances and a strong buffer against external shocks.

"The Philippines has maintained strong economic growth, underpinned by a steady inflow of overseas Filipinos’ remittances, the expansion of the business process outsourcing (BPO) industry and low interest rates," it said in a statement.

The expansion, Fitch noted, is likely to be sustained in the near term with real gross domestic product (GDP) growth averaging 6.5% this year and the next following last year’s 7.2%.

"Fitch believes that the risk of an extended period of overheating, which could lead to either excessive inflation or asset price bubbles, remains limited despite the strong growth momentum."

The country’s external finances remain a key strength, it said, which has helped the Philippines weather the financial market volatility that followed the US Federal Reserve’s announcement of its intent to wind down its massive stimulus program.

"[I]ts net external creditor position reached 7% of GDP in 2013 due to continued current account surpluses. This compared with the -12% median for peers rated in the ‘BBB’ range," Fitch said.

The government’s fiscal position has likewise continued to improve, with the budget deficit falling to 1.4% of GDP last year -- well below a 2% cap -- from 2.3% in 2012.

"Although the fiscal deficit will widen as Typhoon Yolanda-related reconstruction spending accelerates, Fitch projects the general government debt-to-GDP ratio will nevertheless decline to 39% in 2014 from versus 40% in 2013, which will remain in line with ‘BBB’ range peers," it said.

"The stock of government debt also has an extended maturity profile, standing at 10 years in 2013, which reduces rollover risks," it added.

Improvements in governance standards, as measured by international indices such as the World Bank’s framework, were also noted.

"The fundamentals of the Philippines’ banking sector remain stable as capitalization is high, funding and liquidity is healthy and loan-loss reserves are rising," Fitch said.

"The banking sector has already implemented Basel III capital standards at the beginning of 2014. These strengths should help offset the risks of higher credit growth, particularly those related to the property market," the debt watcher added.

"The Philippines’ average per capita income remains low at $2,794 in 2013 compared with the ‘BBB’ range median of $10,880," it noted.

"This measure, however, does not capture the significant support to living standards provided by overseas Filipinos’ remittances."

Moving forward, Fitch said the government must be able to sustain gains posted over the past few years if it wanted to secure a positive rating action.

These include "an improvement in governance and the investment climate, which boosts both domestic and foreign direct investment and overall productivity" and a "sustained, strong GDP growth that narrows income and development differentials with ‘BBB’ range peers, without the emergence of imbalances."

Fitch added that the government needed to further broaden its revenue base and sustain the decline in the country’s debt-to-GDP ratio.

Failure to address "limited" risks of overheating with appropriate monetary and fiscal policy settings, deterioration in governance standards or policy reversal, and instability in the banking sector, however, could warrant a negative rating action, it noted.

"Fitch assumes that the Aquino administration will persist with its fiscal, governance and social reform agenda," the debt watcher said.