London-based debt watcher Fitch Ratings said Tuesday it may upgrade the credit rating of the Philippines next year, after it revised the country’s outlook to positive from stable.
Fitch gave the Philippines a credit rating of BBB-, the minimum investment grade, with a stable outlook in March 2013 and revised the outlook to positive in September this year.
Fitch said in its latest report the recent revision of the country’s outlook meant the Philippines’ rating could possibly be upgraded in the next 12 to 18 months.
“The Philippines’ positive outlook is driven by a steady strengthening in the country’s structural fundamentals, improvements captured in international measures of governance standards and international competitiveness and reflected in [the] Philippines’ strong macroeconomic performance,” Fitch said.
It said the election of a new administration supportive of strong growth and improved budget balance would support a credit upgrade.
“Strong growth, a structural current account surplus and ongoing fiscal policy discipline are driving a steady improvement in the sovereign’s balance sheet. Increased confidence that these trends will be sustained under the next administration after the 2016 presidential elections would support the case for an upgrade,” it said.
Fitch on Sept. 24 adjusted the country’s rating outlook to positive from stable, saying the governance standards and competitiveness indicators showed a steady improvement under the present administration.
It said the country’s global competitiveness, as ranked by the World Economic Forum, rose to a level comparable to ‘BBB’-rated peers.
Indicators for corruption, transparency and economic freedom have also improved substantially, it said.
Fitch said economic growth continued to outperform ‘BBB’-rated peers, and favorable demographics supported the medium-term growth outlook.
Bangko Sentral ng Pilipinas Governor Amando Tetangco Jr. said earlier the positive outlook from Fitch “signaled the long overdue credit rating upgrade, which appropriately reflects the economy’s outperformance.”
Finance Secretary Cesar Purisima said the revised credit outlook and the likely credit rating upgrade reflected what financial markets were saying all along about the Philippines’ creditworthiness.
Fitch said it expected the Philippines’ gross domestic product GDP to grow 5.6 percent in 2015, as domestic demand remained robust even as external demand weakened.
The Philippines’ total dependency ratio is projected to fall over the next three decades, in contrast to most other ‘BBB’-rated peers and other economies across the region.
Fitch said external finances continued to be key credit strength for the country. The Philippines has run current account surpluses since 2003, underpinned by high levels of worker remittances and revenue from the business process outsourcing industry.
“Fitch expects the current account surplus to narrow to 3.5 percent in 2015, but high enough for the country to reinforce its position as a net external creditor. Fitch expects the Philippines’ strong external finances will provide resilience against potential shifts in global investor sentiment, for example following the tightening of US monetary policy,” it said.
However, it said low per capita incomes were a structural weakness. It said the country’s GDP per capita income at $2,836 in 2014 was low compared with the ‘BBB’ median of $10,654.
Fitch said there could be positive rating action in the coming months if the improvement in the governance standards over the Aquino administration could be sustained following a change in government.
“The rating outlooks are positive. Hence, Fitch does not anticipate a material probability of negative action over the forecast period. However, the main factors that could see the ratings revert to stable outlook are deterioration in governance standards or a reversal in reforms that were implemented under the Aquino administration,” it said.
