S&P upgrades Philippine debt rating

By Bettina Faye V. Roc
Associate Editor

S&P GLOBAL RATINGS has raised the Philippines’ credit rating by a notch, citing above-average growth and strong external and fiscal position which have boosted the country’s economic profile.

The debt watcher on Tuesday raised the country’s long-term sovereign credit rating to “BBB+” from “BBB,” bringing it a step closer to bagging a single “A” grade.

S&P assigned a “stable” outlook to the rating, which means it expects to maintain its grade in the next six months to two years as the economy is likely to remain strong over the medium term.

S&P also affirmed its “A-2” short-term rating on the country but revised the transfer and convertibility assessment higher to “A-” from “BBB+”.

The credit rater’s latest action puts its assessment of the Philippines a step higher than those of its peers. Fitch Ratings and Moody’s Investors Service affirmed their “BBB” and “Baa2” ratings — a notch above the minimum investment grade — on the country in December and July last year, respectively, with corresponding “stable” outlooks.

“We raised the rating to reflect the Philippines’ strong economic growth trajectory, which we expect to continue to drive constructive development outcomes and underpin broader credit metrics over the medium term. The rating is also supported by solid government fiscal accounts, low public indebtedness, and the economy’s sound external settings,” S&P said in a statement on Tuesday.

The credit rater said supportive policies and an improving investment climate has helped the Philippines achieve “consistently above-average economic growth” — which it expects to continue as long as the country stays the course.

S&P forecasts annual gross domestic product (GDP) growth at 6.3% this year, keeping the Philippines as one of the fastest-growing economies in the region. It also sees the economy expanding by 6.5% in 2020, 6.6% in 2021, and 6.7% in 2022, reflecting its view of sustained growth on the back of private consumption and investment growth.

“The economy’s constructive trajectory should be underpinned by strong household and company balance sheets, continued income growth, sizeable inward remittance flows, and an adequately performing financial system,” it said.

The debt watcher noted the decline in the country’s unemployment rate as well as economic and fiscal policies that have resulted in “manageable” fiscal deficits and improved spending and revenues, citing in particular the government’s Comprehensive Tax Reform Program as an effective measure as it aims to keep finances sustainable while funding the government’s “aggressive” infrastructure spending.

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Looking ahead, S&P expects general government deficits to remain stable, which will lead to a gradual decline in its debt burden.

For this year, it expects a below-program fiscal deficit of 1.8% of GDP following delays in the passage of the 2019 national budget. It warned that a repeat of this episode could be credit negative for the country.

S&P also flagged inadequate infrastructure as a key constraint to the economy, along with volatile export markets.

“[W]e continue to view as imperative the closure of infrastructure gaps and improvements in the business climate through greater political stability and regulatory reforms, in order for the Philippine economy to continue to expand at or near its long-term potential growth rate,” S&P said.

Meanwhile, the country’s external position, supported by remittances and services exports, will remain a key rating strength, with the debt watcher noting that its rising current account deficit, amid overheating concerns, is “largely investment driven.”

S&P, however, noted that a component of the government’s tax reform program which looks to rationalize incentives while reducing the corporate income tax rate may affect investor sentiment and be a risk to foreign direct investments.

On the other hand, the debt watcher said the Bangko Sentral ng Pilipinas’ (BSP) actions are “broadly neutral” to its ratings as the regulator’s effectiveness is expected to be intact over the medium term, supported by amendments to the BSP Charter passed earlier this year and “the employment of market-based monetary instruments, and the gradual reduction of its reliance on reserve requirement ratios.”

“We consider that a deeper and more diversified financial and capital market would further improve the effectiveness of policy transmission and facilitate improved credit metrics,” S&P said.

The debt watcher said it may raise its ratings on the Philippines over the next two years if the government “makes significant further achievements in its fiscal reform program, or if the country’s external position improves such that its status as a net external creditor becomes more secure over the long term.”

Meanwhile, a significant slowdown in GDP growth or higher-than-expected general government debt could lead to a cut in its credit rating.

Economic managers said S&P’s latest rating action affirms the country’s sustained economic performance, as well as policy and structural reforms that will continue to boost its prospects.

“S&P Global’s credit rating upgrade for the Philippines by one notch higher to “BBB+” is an undeniable tribute to President [Rodrigo R.] Duterte’s unwavering commitment to bold reforms and sound economic policies as embodied in the 10-point Socioeconomic Agenda of the administration and his strong political will to get these tough initiatives done at the soonest,” Finance Secretary Carlos G. Dominguez III was quoted as saying in a statement from the government’s Investor Relations Office (IRO).

BSP Governor Benjamin E. Diokno said S&P’s rating upgrade is a recognition of sound economic management, prudent monetary policy, and strong financial sector supervision.

“Over the years, the BSP has remained committed to its price and financial stability mandates, providing an enabling environment for the economy to flourish. Armed with a new charter that strengthens its ability to carry out its primary mandate of price stability and supervise the banking sector, the BSP will continue to lend support to the economic development goals of the country,” Mr. Diokno said in the same IRO statement.

National Treasurer Rosalia V. De Leon said the government remains committed to fiscal discipline even as it continues to invest in infrastructure and social services.

BSP Deputy Governor Diwa C. Guinigundo said in a text message that the upgrade “would bring more interest among foreign investors to participate in the growth process and in the end further establish and strengthen the upward trajectory of the Philippine economy.”

“The biggest challenge to us is to pursue sustainability: sustainability of policy and institutional reforms, growth and public finance. We also need to address the current account shortfall due to large merchandise trade deficit and ensure that inflation returns to the target range of 2-4%. With splendid record, I am sure we can do it,” Mr. Guinigundo said.