Philippines moves further up investment grade

By Melissa Luz T. Lopez
Senior Reporter

THE PHILIPPINES bagged a credit rating upgrade from Fitch Ratings on the back of continued solid economic growth, supported by optimism over infrastructure and tax reform plans.

The international debt watcher gave a “BBB” rating with a “stable” outlook for the Philippines’ long-term issuer rating, it said in a statement issued late Sunday. This is one notch above minimum investment grade and matches the ratings earlier given by Moody’s Investors Service and S&P Global Ratings.

Fitch had previously pegged the Philippines’ ratings at “BBB-” with “positive” outlook since September 2015, two years since the country was deemed investment grade. The new rating marks the first major upgrade secured under the Duterte administration.

Ratings for senior unsecured foreign and local currency bonds, as well as short-term ratings were also hiked by a notch.

A higher credit rating helps reduce borrowing costs for the economy, as it lowers the default risk priced in for loans extended to the Philippines.

“Strong and consistent macroeconomic performance has continued, underpinned by sound policies that are supporting high and sustainable growth rates,” Fitch said.

“Strong growth momentum remains supported by domestic demand and, more recently, by higher investment spending.”

Investor sentiment has also proven resilient despite political uncertainties, supporting “solid” domestic demand and investment inflows.

“As such, there is no evidence so far that incidents of violence associated with the administration’s campaign against the illegal drug trade have undermined investor confidence.”

Fitch expects annual gross domestic product (GDP) growth at 6.8% for both 2018 and 2019, keeping the Philippines as one of Asia’s fastest-growing major economies.

However, the debt watcher also flagged overheating risks amid rapid growth on the back of brisk loan growth and a wider trade deficit, saying: “Continued strong credit growth raises the risk of credit misallocation and asset bubbles, but we believe that the authorities are aware of such risks and prepared to act to curb excessive risk-taking.“

Officials of the Bangko Sentral ng Pilipinas (BSP) have moved to allay concerns about overheating, noting that robust credit growth is merely keeping up with increased production and business activities.

TAX REFORM CRUCIAL
Looking ahead, sustaining the growth momentum is seen assured with bigger infrastructure spending as part of the P8.4-trillion “Build, Build, Build” program until 2022, further boosted by fresh revenue streams expected from the tax reform program being pursued by the Executive.

“Fitch expects the Philippines’ fiscal profile to improve as a result of the government’s tax reform initiative,” the credit rater added, noting that expected passage of the first tax package will be a “net revenue positive” for the economy.

The first of up to five tax reform packages — designed to broaden the value-added tax base and raise levies on fuel, cars and sugary drinks — will add an equivalent of 0.5-0.8% of GDP to overall revenues, offsetting the reduction in personal income tax collections.

That, in turn, is expected to address the “long-standing weakness” in the country’s fiscal profile, Fitch said. General government revenues are pegged at 18.5% of GDP, well below the 28.8% median for similarly rated economies.

The first tax reform program is currently being finalized by lawmakers in a series of bicameral meetings in time for legislative ratification before the end of sessions this week.

The Finance department hopes to secure President Rodrigo R. Duterte’s signature on the draft law this month, which will take effect on Jan. 1, 2018.

Despite increased state spending, the debt watcher expects sound fiscal policies to persist, supported by a declining debt burden, manageable inflation, ample dollar reserves and monetary policy continuity.

The Philippines’ current account will shift to a narrow deficit at about 0.5% of GDP amid strong imports, but will remain manageable given steady inflows from business process outsourcing, foreign direct investments and worker remittances.

Socioeconomic Planning Secretary Ernesto M. Pernia said in a press release that the development provides more impetus for the government to “ease… entry of foreign investments to take advantage of foreigners’ interest in our country.”

In a separate statement, Finance Secretary Carlos G. Dominguez III anticipated “more positive rating actions” over the next couple of years. He committed that the government will pursue “crucial” reforms on taxation, infrastructure and foreign investments.

BSP Governor Nestor A. Espenilla, Jr. said the credit rating upgrade affirms the expanding productive capacity of the Philippine economy, with domestic conditions and external buffers proving supportive of stronger activity.