‘BBB’ ratings on PH affirmed

MANILA (PNA) — Fitch Ratings on Wednesday affirmed its investment grade ratings on the Philippines on the back of sustained improvement in the country’s economic fundamentals.

To date, the debt watcher gives the country a ‘BBB-‘ rating for long-term foreign currency issuer default rating (IDR) and ‘BBB’ for the local currency IDR.

The outlook for both ratings are ‘Stable’.

In a statement, the credit watcher said its ratings for the country reflected “strong macroeconomic performance.”

It noted that inflows from Filipinos overseas as well as the business process outsourcing (BPO) sectors continued to boost domestic growth.

For one, remittances from Overseas Filipino Workers (OFWs) account for about 10 percent of domestic output.

Thus, Fitch forecasts a 6.3 percent output, as measured by gross domestic product (GDP), for the domestic economy this year and 6.2 percent for 2016.

The government’s growth target for this and next year ranges between seven and eight percent.

Last year, the domestic economy churned in a 6.1 percent growth, lower than the 6.5-7.5 percent target due to the slowdown in the first three quarters of the year.

In the last quarter of 2014, the domestic economy rebounded after posting a 6.9 percent growth, buoyed by the construction activities and the agriculture sector. This growth is better than quarter-ago’s 5.3 percent and the 6.3 percent in the third quarter of 2013.

”The Philippines’ five-year real GDP (gross domestic product) growth was estimated to be 6.3 percent at the end of 2014, which is far above the ‘BBB’ median of 3.0 percent,’ it said.

The debt watcher also said that the country’s external finances was “a key credit strength.”

This as the country continues to enjoy a current account surplus since 2003, which in turn “have supported the build-up in FX (foreign exchange) reserves and turned the country into a net external creditor.”

With this development, it sees the country to be a net external creditor at 15.4 percent of GDP at the end of last year, way better than the net external debtor position of 4.7 percent of GDP of those in the ‘BBB’ median.

Another plus factor for the Philippines is the robust growth of domestic lending boosted by high liquidity situation and “generally buoyant economic conditions.”

It placed average private sector lending growth from 2010-14 to be about 16 percent although it noted that “aggregate size of the banking system remains moderate.”

With this, it projects the end-2014 growth of lending to the private sector to have reached 39.2 percent of GDP, below the 66 percent of ‘BBB’ median.

Fitch have noted regulators’ move to check on the current lending situation in the country, through a bigger focus on the real estate sector and the risks it entails.

Also, the debt watcher said the “abundance in liquidity has not led to evidence of overheating but it is a risk that bears monitoring over the medium-term.”

The pressure that is being created by the high liquidity situation is, on the other hand, seen to ease on the back of the looming increase in US’ interest rates.

Similarly, Fitch does not expect the looming interest rate normalization in the US to result to the end of capital flows to emerging economies like the Philippines.

It also sees rate of price increases to remain within the government’s target, which is two to four percent target for this year until 2018.

Meanwhile, the debt watcher said the state of the government’s finances is a neutral factor on the country’s ratings.

Its assessment, it said, “balances declining general government debt ratios against limited progress in widening the government revenue base.”

The ratings agency forecasts general government debt to decline further to 34.4 percent of GDP in 2016 from an estimated 36.4 percent at the end of last year.

It also cited the below-target budget gap of the government, which is due to fiscal discipline and underspending.

Thus, it cited that the country’s revenue and grants, which stood at 15.1 percent of GDP as of last year, is lower than the 26.6 percent of GDP for ‘BBB’ median.

On the other hand, the weak governance standards and low per capita income remain a risk on the country’s credit rating.

Fitch said the country’s governance standards remain below the ‘BBB’ median.

”Governance standards have strengthened under the Aquino administration since 2010. However, the Philippines continues to score especially low on the World Bank’s Ease of Doing Business and Political Stability metrics, at levels that are far below the ‘BBB’ median,” it said.

In terms of per capita income, the country remains to have low level at USD 2,836 against the USD 10,654 among median peers.

Upside risks to the country’s investment grade rating include the sustained improvement of the country’s governance standards since this is seen to lead “ to a better business climate, which supports higher domestic and foreign investment.”

It also said that robust domestic growth along with narrowing of income and development differentials is also a plus” without the emergence of imbalances.”

Further broadening of government revenues is another plus factor since this “lends stability to the government finances.”

On the other hand, downside risks to the ratings include “sustained period of overheating that leads to instability in the financial system could be considered credit negative” and “deterioration in governance standards or a reversal in reforms that were implemented under the Aquino administration.”

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