Fitch Ratings said Monday it affirmed the Philippines credit rating at investment-grade of ‘BBB’ but revised the outlook on the country’s long-term foreign-currency issuer default rating from “negative” to “stable” on resilient economic growth.
“The revision of the outlook to stable reflects Fitch’s improved confidence that the Philippines is returning to strong medium-term growth after the Covid-19 pandemic, supporting sustained reductions in government debt/GDP, after substantial increases in recent years,” Fitch said in a statement.
The international debt watcher said the revision also reflected its assessment that the Philippines’ economic policy framework remains sound and in line with ‘BBB’ peers, despite its low scores on World Bank Governance indicators.
It said the revision comes despite some relative deterioration over the last years in credit metrics that previously had been strengths, including in government debt/GDP and net external debt/GDP.
“We forecast real GDP growth of above 6 percent over the medium term, considerably stronger than the ‘BBB’ median of 3 percent, after a record outturn of 7.6 percent in 2022, reflecting normalization of activity after the pandemic and the government’s investment program.
It noted that growth moderated to 6.6 percent year-on-year in the first quarter of 2023, with the post-pandemic recovery boost fading. Ongoing reforms to the business environment and investment regulations create upside potential for growth, it said.
Fitch said it expects the general government deficit to narrow to 2.8 percent of GDP in 2023 and 2024, from an estimated 3.3 percent of GDP in 2022 and 4.6 percent of GDP in 2021.
This is consistent with a narrowing of the budgetary central government deficit to 5.7 percent of GDP by 2024 from 7.3 percent of GDP in 2022 and 8.6 percent of GDP in 2021.
Fitch said the gradual pace of consolidation reflects the authorities’ focus on fostering economic growth and development.
It said the narrower general government deficits compared with central government deficits reflect the surpluses of local government units and social security funds.
The government is projecting a CG deficit of 5.1 percent of GDP by 2024, with most of the consolidation coming from spending efficiency gains and capital spending reductions. Fitch said neither would be fully realized in its opinion.
“We consider the fiscal revenue targets unambitious and expect them to be exceeded, as in recent years. However, spending will also likely exceed budgeted amounts. Overall budget balance outturns have tended to be close to targets in recent history,” it said.
Fitch also predicted that GG debt/GDP would decline to about 52 percent by 2024 on strong nominal GDP growth and narrowing fiscal deficits, after inching up to 54 percent in 2022.
It said this is broadly in line with its projections for the ‘BBB’ median, although the Philippines used to be stronger than the median.
The government maintained its CG debt/GDP target of below 60 percent by 2025 and 51 percent by 2028. “In our view, the 2022 debt outturn was flattered by a CG deposit drawdown of nearly 3 percent of GDP, which we do not believe can be repeated,” it said.
Fitch expects the current account deficit to narrow to 2.3 percent of GDP (about $11 billion) by 2024, from an estimated 4.4 percent of GDP (nearly $18 billion) in 2022, reflecting mainly a falling hydrocarbon import bill, which accounted for the spike in the CA deficit in 2022.
“Small structural CA deficits will likely persist in the medium term, even as the commodity shock subsides, on strong domestic demand and the government’s infrastructure buildout,” it said.
