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Fitch affirms PH's 'BBB' rating on strong growth prospects
Debt watcher cites fiscal discipline amid rising public investments

12.20.2018

Fitch Ratings has kept the Philippines’ investment grade of “BBB”, projecting sustained robust economic growth in the years ahead, driven in part by massive public infrastructure investments.

The debt watcher foresees the Philippine economy to grow by 6.6 percent in the next two years.

At the same time, Fitch sees the government keeping its liabilities manageable even as public investments grow. It noted that rising public expenditures, driven by infrastructure, are matched by efforts to raise revenues, such as tax reform. As such, the budget deficit is projected to remain under control, thereby keeping the government’s outstanding debt in check.

“Growth prospects remain favourable, supported by strong domestic demand and increasing infrastructure investment,” Fitch said, adding that the government’s budget deficit is expected “to remain within manageable levels of around -3% of GDP in 2019 and 2020, as revenues are expected to go alongside the increase in government expenditure.”

Consistent with this, Fitch expects the government’s outstanding debt as a percentage of gross domestic product to remain broadly stable at 37 percent by 2020.

The debt watcher has assigned a “stable” outlook on the country’s “BBB” rating, given the absence of factors seen to materially change the country’s credit profile over the short term.

The debt watcher said inflation is likely to go back to within the Bangko Sentral ng Pilipinas’ (BSP) target level of 2.0 to 4.0 percent by 2019 after being elevated in 2018. Fitch recognized the effectiveness of the successive rate hikes implemented by the BSP and the measures done by the national government to ease constraints to rice supply. From May to November this year, the BSP raised its key policy rates by a total of 175 basis points, a proactive move meant to ensure inflation goes back to within target range.

Also, Fitch recognized the stability of the country’s banking sector, which helps fund rising investment activities in the economy. “Rating profiles [of banks] should remain steady backed by satisfactory risk controls, adequate loss-absorption buffers, and generally stable funding and liquidity profiles,” it said.

Welcoming Fitch’s decision are two of the country’s top economic officials.

Finance Secretary Carlos Dominguez III said: “Fitch’s forecast of strong growth in the years ahead affirms the soundness of the Duterte administration’s economic development strategy, which is to sustain high growth, accelerate poverty reduction, and achieve financial inclusion by way of unmatched investments in infrastructure modernization and human capital development without losing its grip on fiscal discipline.”

Dominguez added: The first package of the CTRP (Comprehensive Tax Reform Program), which has already delivered in terms of raising more revenues to fund the government’s priority programs, along with the rest of the tax reforms that we hope the Congress can pass in 2019, will put in place a simplified tax system that will primarily benefit ordinary taxpayers and small businesses while being supportive of our medium- and long-term goals for the Philippines to become an upper-middle income economy by 2022 and a high-income one by 2040.” 

BSP Governor Nestor Espenilla, Jr. said: “Fitch’s favorable growth projection for the economy is consistent with that of the BSP. We expect growth to remain solid in the years ahead, owing in part to the BSP’s commitment to price and financial stability, which provides an enabling environment for businesses to thrive and for consumers to keep their purchasing power intact. We will continue to complement the government’s development efforts through conduct of sound and proactive monetary policy and financial supervision.”

Espenilla noted the latest inflation forecast pointing to within-target inflation in 2019 and 2020 following the successive monetary policy increases done by the BSP’s Monetary Board this year. “The elevated inflation in 2018 was mainly driven by supply-side factors that are beyond the control of monetary policy, but we acted pre-emptively to address any brewing demand-side pressures and potential second-round effects ahead. This proactive move will help ensure that inflation settles within target, at least over the next two years,” Espenilla said. 

Meantime, in response to Fitch’s statement of some perceived overheating risks of the economy, BSP Deputy Governor Diwa Guinigundo stressed that the economy is not facing any material threat of overheating. 

“While credit is growing, the pace of increase is within levels considered manageable based not only on the BSP’s own metrics but even on international benchmarks. Additionally, credit growth in the country is driven not only by consumption, but more importantly by investment activities which boost the economy’s productive capacity. As such, we see growth in demand continually and sufficiently being matched by rising supply, thereby continuing to dampen demand-side inflationary pressures moving forward,” Guinigundo said.

The Philippines’ “BBB” rating with Fitch matches the “BBB” rating assigned by S&P Global and the “Baa2” rating by Moody’s Investors Service. In the meantime, S&P assigns a “positive” outlook on its rating on the Philippines, signaling opportunity for an upgrade.

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