S&P keeps Philippines’ grade but flags risks

STANDARD & Poor’s (S&P) has maintained its credit rating on the Philippines at a notch higher than the minimum investment grade, citing the country’s strong external payments position, improving state finances, and healthy prospects for economic growth.

In a statement on Friday, the global watcher said it has affirmed its “BBB” score on the sovereign, with a “stable” outlook.

The rating and the outlook were first issued by S&P in May last year when it upgraded the country from the “BBB-” minimum investment grade, also with a “stable” outlook.

“The ratings on the Philippines reflect our assessment of its strong external position, which features rising foreign exchange reserves and a low external debt burden,” the credit rating agency said in the statement.

“We expect the Philippines to remain in a net external creditor position,” S&P said, adding that it does not “envisage a marked deterioration in the Philippines’ external financing from a shift in foreign direct investments or portfolio equity investments, or from a reduction in disbursements from donors.”

S&P likewise cited the country’s sound balance sheet.

“The government has made advances in fiscal consolidation, with fiscal deficits averaging 2% of GDP (gross domestic product) over 2010-2014, compared with an average of 4% for the past decade. We forecast its fiscal deficits to average 1% over 2015-2019,” read the statement.

Moreover, prospects for stronger economic growth underpin the country’s credit rating, S&P said. “High household consumption, investment, and exports (mainly of electronics, commodities, and services) continue to support economic activity,” it explained.

S&P said it expects the economy to grow by 6.2% this year, 6.4% next year, 6.1% in 2017, and 6.0% in 2018.

Its 2015 and 2016 estimates, however, fall short of the 7-8% growth target the government had set for both years.

“Uncertain conditions in export markets and inadequate infrastructure mainly in transportation and energy are the main factors that add downside risks to our growth outlook,” S&P explained.

“Without the closure of infrastructure gaps and improvements in the business climate through regulatory reforms, the Philippines may not achieve lower-middle-income status in 2016, where per capita GDP exceeds US$3,000.”

The global debt watcher said it could raise its rating on the Philippines “if further institutional and structural reforms boost investment and economic growth prospects, or if changes in governance and the policy environment lead us to a better assessment of institutional and governance effectiveness.”

On the other hand, S&P warned that any reversal of gains made so far in the country’s fiscal and external positions, as well as if the next administration were to fail to sustain reform momentum, could result in a rating downgrade.

Bangko Sentral ng Pilipinas (BSP) Governor Amando M. Tetangco, Jr., in a statement issued by the government’s Investor Relations Office, said: “Fundamentals of the Philippines significantly improved over the last few years. With the trend staying positive, additional upgrades in the credit ratings over the medium term should be achievable.”

“On the part of the BSP, efforts to further improve the regulatory environment for financial institutions, maintain price stability and strengthen external payments position would be its contributions to placing the economy on an even higher gear,” Mr. Tetangco said.

In the same statement, Finance Secretary Cesar V. Purisima said a credit rating in the “A” category should be attainable, especially since the country remains underrated compared to similarly rated peers.

“If compared with those of other emerging markets, fundamentals of the Philippines are one of the strongest. And with continually improving major credit indicators, including debt manageability, credit ratings ideally should adjust accordingly,” Mr. Purisima said.

At a notch above the lowest investment grade, S&P’s rating is the highest the Philippines has scored to date.

Moody’s Investors Service also rates the Philippines a notch above the minimum investment grade after it had upgraded the country to “Baa2”, with a “stable” outlook, last December from the “Baa3” grade issued in October 2013.

Fitch Ratings, on the other hand, affirmed last month its minimum “BBB” investment score that was issued in March 2013.

The Japan Credit Rating Agency and South Korea-based National Information and Credit Evaluation Ratings, Inc. have given the country investment grade status.