Global debt watcher Standard & Poor’s on Wednesday affirmed the “BBB” investment-grade credit rating it gave to the Philippines on May 8, 2014 with a stable outlook.
“In addition, we affirmed our ‘axA/axA-2’ Asean regional scale ratings on the Philippines,” S&P Global Ratings said in a statement.
“The ratings on the Philippines reflect our assessment of its lower middle-income economy and rising uncertainties surrounding the stability, predictability and accountability of its new government,” S&P said.
“Offsetting these weaknesses is the Philippines’ strong external position, which features rising foreign exchange reserves and low and declining external debt,” it said.
Bangko Sentral ng Pilipinas Governor Amando Tetangco Jr. said the Philippines’ ability to keep its credit rating well within the investment grade scale, which transcended change in political leadership, was a testament that the country’s economic gains have been built from deeply rooted structural and sound policy reforms over the years.
“Through continued conduct of sound monetary policy and prudent bank supervision, as well as efficient management of the country’s external accounts, the BSP will help make sure these economic gains are further enhanced moving forward,” Tetangco said.
Finance Secretary Carlos Dominguez III said the continued investment-grade rating gave the new government greater resolve to “transform the economy into a truly inclusive one by pursuing, among others, a tax reform plan that seeks to generate enough revenues to grow the middle class, energize the corporate sector and raise investments in human capital and social protection to drastically reduce poverty incidence.”
S&P cited the Duterte administration’s 10-point plan to reduce poverty, promote a “law abiding society” and achieve peace settlements with separatists in Mindanao.
The administration also seeks macroeconomic stability guided by orthodox fiscal, economic and development policies.
S&P said President Rodrigo Duterte’s strong focus on improving “law and order,” which allegedly resulted in numerous instances of extrajudicial killings since he came to power, could undermine respect for the rule of law and human rights.
“When combined with the president’s policy pronouncements elsewhere on foreign policy and national security, we believe that the stability and predictability of policymaking has diminished somewhat,” S&P said.
It said uncertain conditions in export markets and inadequate infrastructure mainly in transportation and energy were the main downside risks to growth outlook for the Philippines.
S&P said without the closure of infrastructure gaps and improvements in the business climate through greater political stability and regulatory reforms, the Philippines might not achieve a middle-income status in 2017, where per capita GDP exceeds $3,000.
The credit rating agency said a higher rating was unlikely over the two-year ratings horizon, but it might raise the ratings if continued fiscal improvements under the new administration would boost investment and economic growth prospects, or if improvements in the policy environment could lead to a better assessment of institutional and governance effectiveness.
“We may lower the ratings if, under the new administration, the reform agenda stalls or if there is a reversal of the recent gains in the Philippines,” S&P said.
S&P said other factors that could mitigate risks associated with the Philippines’ international liabilities were a very low reliance on external savings by its bank and company sectors and the low and mainly long-term nature of the government’s external borrowings.
It also mentioned domestic banks being mainly deposit funded, with high liquidity and limited linkages to global markets.
“The strengthened oversight of the financial sector by the Bangko Sentral ng Pilipinas combined with modest growth in private sector debt and real estate prices have also contributed to improved system stability in recent years,” it said.
