FITCH RATINGS has maintained its grade for Philippine debt, citing the country’s sustained strong overall economic growth even as it flagged overheating risks evidenced by rapid bank lending and a growing trade gap.
The global debt watcher kept the Philippines’ credit rating at “BBB” — one notch above minimum investment grade — with a “stable” outlook. This is meant to vouch for the Philippine government’s ability to pay its debts, in turn helping reduce borrowing costs from foreign creditors.
“The ratings on the Philippines balance favorable growth prospects, lower government debt and a net external creditor position against lower per capita income levels, a weaker business environment and lower standards of governance compared with its rating category peers,” Fitch said in a Dec. 19 statement.
This comes a year after Fitch upgraded the Philippines from minimum investment grade, putting it on the same level as the ratings given by S&P Global Ratings and Moody’s Investors Service.
Fitch credit analysts drew optimism from “favorable” growth prospects here, as they expect strong domestic demand and rising infrastructure investments led by the state to propel expansion. They expect gross domestic product (GDP) to grow by 6.6% in 2019 and 2020, faster than the 6.3% January-September average.
Robust state spending for infrastructure will continue to drive growth, while keeping the budget deficit “manageable” at three percent of GDP over the next two years and in line with government projections.
At the same time, revenue collections are rising on a boost from the first tax reform package that took effect Jan. 1.
A healthy fiscal balance will keep the country’s debt burden “broadly stable” at 37% of GDP by 2020 from 37.5% this year, Fitch added.
Fitch also expects inflation to slow in 2019 after overshooting the central bank’s 2-4% target band this year. “Fitch expects full-year inflation to average 5.2% in 2018 and to decline to within the central bank’s target range of 2-4% in 2019 and 2020 as the cumulative rate increases of 175bp (basis points) in 2018 take effect and as the impact of excise tax hikes in 2018 dissipates,” the debt watcher said.
However, Fitch flagged overheating risks — or signs that the economy may be growing faster than potential that is capped by constraints like inadequate infrastructure — as seen through double-digit increases in bank lending as well as a ballooning external trade gap. “Fitch believes that overheating risks remain in place, highlighted by rapid credit growth and a widening current-account deficit, although the central bank’s stated intention is to remain vigilant against developments that could affect the inflation outlook,” the statement read further.
The current account — which measures fund flows from goods and services trading — is expected to expand to a $6.4-billion shortfall this year, equivalent to 1.9% of GDP which would be the widest since 2001. Latest data from the Bangko Sentral ng Pilipinas (BSP) put the current account deficit at $6.47 billion in the nine months to September, as imports continued to outpace exports.
Fitch said it sees the current account deficit at equivalent to two percent of GDP this year due to a surge in capital goods imports and a sharp drop in exports. The level is likely to be sustained at 1.9% of GDP in the next two years, buoyed by dollar inflows from remittances, tourism receipts and outsourcing revenues.
BSP Deputy Governor Diwa C. Guinigundo countered this view, saying the economy is not in danger just yet.
“While credit is growing, the pace of increase is within levels considered manageable based not only on the BSP’s own metrics but even on international benchmarks. Additionally, credit growth in the country is driven not only by consumption, but more importantly by investment activities which boost the economy’s productive capacity,” Mr. Guinigundo said in a press statement.
“As such, we see growth in demand continually and sufficiently being matched by rising supply, thereby continuing to dampen demand-side inflationary pressures moving forward.”
Still, the credit rater draws optimism from “high” dollar reserves maintained by the BSP and a “fairly steady” banking sector.
Foreign direct investments should also receive a boost from the recent easing of the government’s negative list that otherwise spells out sectors and economic activities where foreign participation is either banned or restricted.
Continued strong economic growth, stronger governance standards and increased revenue collections may trigger credit rating upgrades in the future, Fitch said.
On the flip side, the reversal of reforms and a “sustained period of excessive credit growth” could lead to downgrades. — Melissa Luz T. Lopez

RELATED ARTICLESMORE FROM AUTHOR