Fitch: PH ‘stable’ but lags in key indicators

Debt watcher Fitch Ratings on Friday affirmed the Philippines’ “BBB” investment grade rating with a stable outlook, even as it noted that the country’s structural indicators continue to lag behind…READ

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Debt watcher Fitch Ratings on Friday affirmed the Philippines’ “BBB” investment grade rating with a stable outlook, even as it noted that the country’s structural indicators continue to lag behind its peers.

“The ratings balance the Philippines’ prospects of strong sustainable growth and high levels of foreign-exchange reserves against relatively low per-capita income, governance indicators, and government revenue,” Fitch said in a statement.

The ‘BBB’ is a notch above minimum investment grade while the “stable” outlook means the rating is likely to remain unchanged within next 12-18 months.

The credit ratings agency said it expects the Philippine economy to expand at more than 6 percent annually over the medium term, which is well above the current peer median.

This year, it estimated that the country’s gross domestic product (GDP) will grow 6.1 percent “as momentum is likely to recover after a slowdown to 5.6 yoy (percent year-on-year) in the first quarter from weaker exports and government spending due to the delay in the passage of the 2019 budget.”

Fitch’s projection was lower than last year’s actual growth of 6.2 percent and falls at near the lower end of the government’s downwardly revised 6.0-7.0 percent target.

A dispute between the Senate and the House of Representatives over alleged insertions resulted in the four-and-a-half-month delay of the passage of this year’s budget. This forced the government to run on last year’s budget, limiting it to spend for items detailed in the 2018 outlay and not on programs and projects supposed to be implemented this year.

This put total national government spending in January to March — which include expenditures for infrastructure and capital outlay, maintenance, personnel services and subsidies — at P778 billion, up 0.8 percent or P6 billion from the amount in the same period last year.

This resulted in a lower-than-expected 5.6 percent Philippine economic growth in the first three months of the year, well below the government’s target.

That said, Fitch noted that growth will remain supported by strong private consumption and the government’s public-investment program, but warned that risks to growth could come from the slowdown in China and spillovers from escalating US-China trade tensions.

Meanwhile, the debt rater said the country’s gross international reserves coverage will remain adequate to cover more than six months of imports this year until 2021.

Latest data show that the country’s dollar reserves rose to a 30-month high of $83.955 billion in April on the back of the central bank’s foreign exchange operations and investment income plus foreign currency deposits by the government.

“The Philippines remains less vulnerable to large outflows compared with some of its neighbours in the region due to lower non-resident holdings of domestic debt,” Fitch said.

However, Fitch noted that “the Philippines’ structural indicators continue to lag behind those of rating category peers,” expecting the country’s GDP per capita to reach $3,358 this year, lower compared with the current ‘BBB’ category median of $11,353.

It also stressed that standards of governance and human development are also weaker in the Philippines than its peer median.

“The Philippines ranks in the 41st percentile of the World Bank’s governance indicators, compared with the 56th percentile of the current peer median,” Fitch added.

Nevertheless, it pointed out that the decisive victory of President Rodrigo Duterte’s allies in the Congress during mid-term elections last month “has increased the ability of the government to implement its agenda.”

On the other hand, the credit watchdog said gross general government revenues in the Philippines — at 19.7 percent of GDP at end-2017 — were below the ‘BBB’ median of 27 percent.

But it noted that the improvement in central government revenues will be the result of a Comprehensive Tax Reform Program (CTRP), notably the implementation of its first package or the Tax Reform for Acceleration and Inclusion Act that was passed last year and is expected by the government to deliver the bulk of the revenue gains.

“Fitch also expects some progress in the passage of the remaining parts of the tax reform, which are designed to be broadly revenue-neutral,” the debt watcher added. The still to be approved CTRP packages are:

• Package 1B, which seeks to reform the Motor Vehicle Users’ Charge;

• Package 2, which calls for the reduction of corporate income tax reduction and streamlining of fiscal incentives, that has already been passed by the House of Representatives as the Tax Reform for Attracting Better and High-Quality Opportunities (Trabaho) bill;

• Package 2 Plus, which proposes additional excise taxes on tobacco and alcohol products as well as increase the government’s share from mining.

• Package 3, which covers reforms in property valuation;

• Package 4, which proposes the rationalization of capital income tax, that has also been approved by the House.

“We are glad Fitch has taken note of the Philippine economy’s resilience to both external and domestic headwinds,” Finance Secretary Carlos Dominguez 3rd said in a statement following the rating-affirmation by Fitch.

“In part, the strength of the economy is credited to the decisive leadership of President Duterte who has demonstrated strong political will in implementing unpopular game-changing reforms to sustain the growth momentum and achieve financial inclusion for all,” he added.

For his part, Bangko Sentral ng Pilipinas (BSP) Governor Benjamin Diokno said, “Guided by its price stability mandate, the BSP will continue to adhere to the conduct of sound monetary policy, making sure it is properly calibrated to provide an environment that enables sustainable economic growth.”

Fitch said it believes overheating risks have subsided following the cumulative rate hikes of 175 basis points implemented by the central bank last year.

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