Fitch Ratings said Thursday it affirmed the Philippines’ investment-grade score of ‘BBB’ with a stable outlook, as growth prospects remained favorable.
“The ratings on the Philippines balance favourable growth prospects, lower government debt, and a net external creditor position against lower per capita income levels, a weaker business environment and lower standards of governance compared with its rating category peers,” it said.
“The Philippines maintains a net external creditor position against the ‘BBB’ median’s net debtor position. In addition, the Philippines is less vulnerable to large outflows compared with some of its neighbours in the region, given lower non-resident holdings of domestic debt and equities, although foreign outflows are likely in 2019 as global monetary conditions continue to tighten,” it said.
Fitch said growth prospects in the country remained favourable, supported by strong domestic demand and increasing infrastructure investment.
Fitch, however, said overheating risks remained in place, highlighted by rapid credit growth and a widening current-account deficit, although the Bangko Sentral’s stated intention was to remain vigilant against developments that could affect the inflation outlook.
“Inflation pressures now appear to be easing, partly due to recent monetary policy tightening and easing of some supply-side pressures. We forecast GDP growth to remain strong in 2019 and 2020 at around 6.6 percent, supported by robust private consumption and public investment,” it said.
Fitch said GDP growth could come under downward pressure, similar to other countries in the region, from the slowdown in China and escalating trade tensions with the US and from rising domestic and global interest rates.
Inflation, which peaked at 6.7 percent in October, eased to 6 percent in November, supported by a combination of policy rate increases, easing of supply-side constraints on rice availability and some moderation in commodity prices.
Fitch said it was expecting full-year inflation to average 5.2 percent in 2018 and to decline to within the central bank’s target range of 2 percent to 4 percent in 2019 and 2020 as the cumulative rate increases of 175 basis points in 2018 take effect and as the impact of excise tax hikes in 2018 dissipates.
It said government revenue continued to increase following the implementation of tax package 1A at the beginning of 2018. The agency expects central government revenue to reach 16.5 percent of GDP in 2019 and 16.7 percent in 2020, up from 15.6 percent in 2017.
It said, however, that there were delays in additional reforms that would improve the efficiency of the tax system, but these reforms are likely to be revenue neutral once implemented.
Infrastructure spending continues to drive central government expenditure. Disbursements for infrastructure and other capital outlays exceeded authorities’ target by P38.2 billion in January to September, data showed.
Fitch said it expected the budget deficit to remain within manageable levels of around -3 percent of GDP in 2019 and 2020, as revenue should rise alongside the increase in government expenditure. The agency said the government debt-to-GDP ratio was expected to remain broadly stable at 37 percent by 2020, compared with an estimated 37.5 percent in 2018.
A widening current-account deficit amid tighter global monetary conditions and a stronger dollar drove the peso down by around 6 percent against the US dollar in the year to date. It said while gross international reserves declined $5.7 billion since the start of the year, the coverage of current external payments would remain high at 6.8 months at end-2018.
Fitch said the current-account deficit would likely widen to around 2 percent of GDP in 2018 driven by strong capital goods imports and a sharp slowdown in exports.
Meanwhile, foreign direct investment inflows increased to $8 billion in the first nine months of 2018, up 24 percent from the same period last year, suggesting foreign investor sentiment remains positive.
“The recent passage of the 11th regular foreign investment negative list could further ease restrictions on foreign investment. The Philippines slipped by 11 notches on the recent World Bank’s Ease of Doing Business Index rankings, but this was mainly on account of a sharp decline in its Getting Credit score,” it said.
Fitch the GDP per capita would reach $3,179 as of end-2018, compared with the ‘BBB’ median of $10,657.