Fitch upgrades PHL outlook to stable

FITCH RATINGS affirmed the Philippines’ investment grade rating, while upgrading its outlook to stable from negative, reflecting its confidence in the economy’s continued recovery from the pandemic.

In a statement, the rating company kept the Philippines’ long-term foreign currency issuer default rating at “BBB.” A “BBB” rating indicates low default risk and adequate capacity to pay, although some unfavorable economic conditions could impede this.

“The revision of the outlook to stable reflects Fitch’s improved confidence that the Philippines is returning to strong medium-term growth after the coronavirus disease 2019 (COVID-19) pandemic, supporting sustained reductions in government debt/gross domestic product (GDP), after substantial increases in recent years,” it said.

A stable outlook indicates that the country’s rating is likely to be maintained rather than lowered or upgraded in the medium and long terms or over the next 18-24 months.

Fitch downgraded the Philippines’ outlook to negative in July 2021 due to the pandemic’s impact on the economy.

“Fitch’s latest rating action reflects the strong economic activity which can be fostered by the improved investment climate in the country,” Finance Secretary Benjamin E. Diokno said in a statement. “The country’s growth is further supported by the steady improvement of our labor and employment conditions.”

The Philippine economy expanded by 7.6% in 2022, and by 6.4% in the first quarter. The government is targeting 6-7% GDP growth this year.

Fitch expects the Philippines’ real GDP growth at above 6% in the medium term, which is “considerably stronger” than the “BBB” median of 3%.

“The (outlook) revision also reflects our assessment that the Philippines’ economic policy framework remains sound and in line with ‘BBB’ peers, despite its low scores on World Bank Governance indicators,” it said, noting weak scores in political stability and rule of law “may overstate relative weaknesses for creditworthiness.”

The credit rater said it had upgraded the outlook to stable despite “some relative deterioration over the last years in credit metrics that previously had been strengths, including in government debt/GDP and net external debt/GDP.”

Fitch expects the general government (GG) deficit to narrow to 2.8% of GDP in 2023 and 2024, and the budget deficit to 5.7% of GDP by 2024.

While debt remains high, this is expected to come down in the near term.

“We project GG debt/GDP will decline to about 52% by 2024 on strong nominal GDP growth and narrowing fiscal deficits, after inching up to 54% in 2022. This is broadly in line with our projections for the ‘BBB’ median, although the Philippines used to be stronger than the median,” it said. 

On the other hand, it sees the central government’s debt-to-GDP ratio ease to 59% by 2024.

At the end of March, the National Government’s debt-to-GDP ratio stood at 61%, still slightly above the 60% threshold considered manageable by multilateral lenders for developing economies.

The government aims to cut the debt-to-GDP ratio to less than 60% by 2025, and further to 51.5% by 2028.

Fitch also expects the current account (CA) deficit to narrow to 2.3% of GDP next year, “reflecting mainly a falling hydrocarbon import bill, which accounted for the spike in the current account deficit in 2022.”

“Small structural current account deficits will likely persist in the medium term, even as the commodity shock subsides, on strong domestic demand and the government’s infrastructure buildout. Before 2019, Philippines had a long record of CA balances and surpluses, distinguishing it from the ‘BBB’ median,” it added. — Luisa Maria Jacinta C. Jocson