PHL rating affirmed, GDP forecast hiked

By Melissa Luz T. Lopez, Businessworld, Mar 30, 2017

THE PHILIPPINES yesterday got a shot in the arm amid nagging political noise, as Fitch Ratings, Inc. affirmed the country’s credit standing and S&P Global Ratings raised its growth forecast anew.

Fitch has affirmed the Philippines’ minimum investment grade credit rating, citing strong gross domestic product (GDP) growth even as it flagged that the economy is held back by relatively low revenue collections that could stand in the way of the state’s “ambitious” reforms.

In a statement late Wednesday, the debt watcher affirmed the country’s long-term issuer default ratings at “BBB-” with a positive outlook, the lowest investment grade status. Ratings for senior unsecured foreign and local currency bonds, as well as short-term ratings were also maintained.

“The Philippines’ ratings reflect its continued strong and consistent growth performance, a robust net external creditor position and government debt levels that are lower than the median of peers in the ‘BBB’ rating category,” the statement read, while flagging that the country’s ratings “remain constrained by relatively weak governance standards, a narrow government revenue base, and levels of per capita income and human development.”

The Philippine economy expanded by 6.8% in 2016 on the back of an investments surge and strong consumption. Fitch expects the economy to expand just as fast this year, before slightly slowing to 6.7% in 2018.

“Macroeconomic performance has remained strong despite the increase in incidents of violence associated with the administration’s campaign against the illegal drug trade while domestic political stability has been maintained,” referring to President Rodrigo R. Duterte’s deadly war on drugs.

“Fitch will continue to monitor the impact of the president’s campaign against drugs on economic performance, financing flexibility and capital flows.”

Government spending is expected to continue its rise, with Fitch projecting the fiscal deficit to widen to three percent of GDP, coming from last year’s 2.4%.

Inflation is expected to remain manageable with a forecast of 3.3%, within the central bank’s 2-4% target band and against a 3.4% government forecast.

The current account, however, is expected to reverse to a “modest” deficit over the next two years to reflect an import surge amid the government’s infrastructure push, Fitch added.

Still, the economy is likely to remain well-cushioned against external shocks with more than enough reserves.

At the same time, Fitch analysts flagged the need to increase the government’s tax haul in order to raise its chances for a rating upgrade and finance its spending plans. National government revenues are seen to be equivalent to 22% of GDP, well below the 30% median among similarly rated economies.

Fitch cited the government’s tax reform plan now pending in Congress for its potential to give revenues this much-needed boost, although it flagged “execution risks.”

Sustained strong growth, broadening the tax base and improved governance standards could also inspire a rating upgrade, Fitch said.

‘ONE OF THE GOOD STORIES’

Yesterday also saw S&P raising its growth forecast for the Philippines anew, noting the economy will remain robust and largely insulated from external shocks on the back of increased government spending and an upbeat business process outsourcing (BPO) sector.

The debt watcher sees a 6.6% expansion for gross domestic product (GDP) this year, higher than the 6.4% estimate penciled in January, according to S&P’s latest credit conditions outlook released on Tuesday.

The new forecast comes after 2016 growth clocked 6.8%, as announced by the government on Jan. 26, which beat the credit rater’s 6.6% estimate.

By 2018, the Philippine economy is seen to expand by 6.4%, cementing the country’s position as one of the fastest-growing in Asia and the Pacific next only to India among comparable key economies.

Paul Gruenwald, S&P managing director and chief economist for Asia-Pacific, said the economy is seen sure to expand by at least 6.5% this year. If realized, this would match the floor of the government’s 6.5-7.5% growth goal for 2017.

“The Philippines has actually been one of the good stories in Asia Pacific over last decade…,” Mr. Gruenwald said in a webcast yesterday.

“That’s really rested on two things: one is business processing operations, which have been quite successful in democratizing growth in the Philippines,” he added, noting that “[a]s a source of stability, it’s not very susceptible to what’s going in the broader global economy.”

The BPO industry is estimated to have brought in approximately $25 billion last year and hired over a million people, remaining a key pillar for the local economy alongside a rising stream of remittances from overseas Filipino workers.

Increased government spending — expected after President Rodrigo R. Duterte committed faster rollout of state projects than his predecessor, particularly for infrastructure — also boosts overall growth prospects, the credit analyst added.

State spending grew by 14% in 2016, outstripping a four percent increase in revenues that led to a six-year high in the country’s fiscal deficit at 2.4% of GDP. In absolute terms, last year’s P353.422-billion gap was nearly three times 2015’s P121.689 billion (0.9% of GDP) but still fell nine percent short of a P388.9-billion program for 2016.

However, preliminary data showed that disbursements increased by a slower seven percent in January, while revenues rose by a tenth from a year ago.

The government is looking to boost spending further this year, having set a deficit ceiling at three percent of GDP.

“If we continue to see good business in the BPO sector and reasonable fiscal constraint particularly on the expenditure side, that’s going to very supportive of growth,” Mr. Gruenwald added.

The Philippines currently holds a “BBB” rating with a “stable” outlook from S&P, which is a notch above junk status.

Inflation is also seen to remain manageable, with the debt watcher expecting the pace of price increases at 3.1% this year and 3.5% in 2018, still well within the central bank’s 2-4% target range.

The looming change in leadership at the Bangko Sentral ng Pilipinas (BSP) is also unlikely to have an impact on the financial system and on overall economic prospects, Mr. Gruenwald said, given the solid record of the institution and its “talent pool.”

BSP Governor Amando M. Tetangco, Jr. will step down on July 2 after a 12-year stint at the central bank’s helm.