International credit watchdog S&P Global Ratings affirmed its “BBB” or investment grade rating for the Philippines with a stable outlook, citing the country’s robust external position and declining external debt.
The “BBB” rating, an upgrade from “BBB-”, was given on May 8, 2014, also with a stable outlook.
S&P also affirmed the ‘axA/axA-2’ Asean regional scale ratings on the Philippines. The transfer and convertibility assessment was unchanged at ‘BBB+’.
“The ratings on the Philippines reflect our assessment of its strong external position, which features ample foreign exchange reserves and low and declining external debt. This strength is balanced by the Philippines’ lower-middle income economy, and emerging policymaking settings,” it said in a statement over the weekend.
It said the stable outlook reflected its view that the policy environment remained conducive for sustained economic growth that contributes to continued stability of the sovereign’s fiscal and debt metrics.
“We may raise the ratings if the newly-calibrated fiscal program under this administration significantly boosts investment and economic growth prospects, or if improvements in the policy environment lead us to a better assessment of institutional and governance effectiveness,” S&P said.
It said the ratings might be lowered “if the reform agenda stalls or if the recalibrated fiscal program leads to higher-than-expected deficits sufficient to reverse the progress made under the previous administration.”
S&P mentioned the Duterte government’s “10-point plan” to reduce poverty, promote a law-abiding society, and achieve peace settlements with separatists in Mindanao. Other priorities include macroeconomic stability guided by orthodox fiscal, economic, and development policies.
“The Philippines has a comparatively diversified economy. We estimate GDP per capita will rise to about $2,950 in 2017. We project GDP per capita growth will average 4.9 percent per year over 2017-2020, reflecting the balance of a strong domestic economy and a modest collective outlook for the Philippines’ trading partners,” it said.
It said high household consumption, investment, and exports (mainly of electronics, commodities, and services) continue to support economic activity. These strengths will likely be underpinned by strong household and company balance sheets, sound growth in jobs and income, inward remittance flows, and an adequately performing financial system.
“Another key rating strength for the Philippines is the country’s external position. The current account is likely to remain modestly in surplus (averaging 1.0 percent of GDP annually to 2020), reflecting robust services exports (including mainly tourism, healthcare, maritime, and business process outsourcing), large remittance inflows, and lower oil prices,” it said.
S&P said competitive unit labor costs relative to peers (such as Thailand and Indonesia) and a large
young, educated, and flexible labor market implied further strength in services exports over the next five years. It said participation in free trade agreements could provide further upside to the Philippines’ export earnings.
“We expect the Philippines to remain in a solid net external creditor position, demonstrated by its narrow net external debt averaging about negative 24.8 percent over 2017-2020 (a negative number indicates net external lending),” it said.
“External liquidity will also remain a sound 67 percent on average over the period. We do not envisage a marked deterioration in the Philippines’ external financing from a shift in foreign direct investments or portfolio equity investments, or from a reduction in disbursements from donors,” it said.
However, S&P said uncertain conditions in export markets and inadequate infrastructure mainly in transportation and energy were the main downside risks to the Philippines’ growth outlook.
It said without the closure of infrastructure gaps and improvements in the business climate through greater political stability and regulatory reforms, the Philippines might experience challenges in maintaining its relatively robust rate of economic expansion over the medium to long term.