Fitch affirms PHL rating at ‘BBB’

Fitch Ratings affirmed the Philippines’ investment grade rating and maintained its “stable” outlook, citing the economy’s strong medium-term growth prospects. 

The debt watcher in a rating action commentary dated Nov. 10 said it affirmed the Philippines’ long-term foreign currency issuer default rating at “BBB,” a notch above the minimum investment grade.

A “BBB” rating indicates low default risk and reflects the economy’s adequate capacity to pay debt.

Fitch also kept the outlook on the rating at “stable,” which means it is likely to be maintained rather than lowered or upgraded over the next 18-24 months. It had earlier revised the outlook to “stable,” from “negative” last May.

“The ‘BBB’ rating and ‘stable outlook’ reflect the Philippines’ strong medium-term growth prospects, which support gradual reduction in government debt/GDP (gross domestic product) over the medium term, after substantial increases in recent years,” the credit rater said.

However, the rating is held back by the Philippines’ weak scores in the World Bank Governance Indicators, “some of which, in Fitch’s view, may overstate relative weaknesses for creditworthiness.”

“Relatively low GDP per head also weighs on the rating, despite gradual increases over the years. The economy’s size supports the ratings but is not a strength compared with some similarly rated regional peers,” Fitch added.

Fitch said Philippine GDP growth will likely be above 6% over the medium term, stronger than the 3% median for economies with a “BBB” rating. This will be “supported by large investments in infrastructure and reforms to foster trade and investment, including through public-private partnerships (PPPs),” it added.

The Philippine economy expanded by 5.9% in the July-to-September period, faster than the 4.3% growth in the second quarter but slower than the 7.7% expansion in the same quarter in 2022. For the first nine months of the year, economic growth averaged 5.5%, still below the government’s 6-7% full-year target.

Inflation a risk
However, inflation may remain sticky in the medium term, Fitch Ratings said. Inflation is expected to moderate to 3.5% by 2025, near the upper end of the 2-4% target of the Bangko Sentral ng Pilipinas (BSP).

“Inflationary pressures persist and pose a risk to these forecasts,” it added.

Headline inflation eased to 4.9% in October from 6.1% in September and 7.7% in October 2022. Year to date, inflation averaged 6.4%. This is still above the BSP’s 5.8% baseline forecast for the full year.

“We continue to view the central bank’s inflation-targeting framework and flexible exchange rate regime as credible,” Fitch said.

The Monetary Board raised rates by 25 basis points at an off-cycle meeting last month, bringing the benchmark rate to a fresh 16-year high of 6.5%. It is widely expected to keep rates steady at its meeting on Thursday.

“We welcome Fitch’s recognition of the work being done by the central bank to bring inflation back to within the target range,” BSP Governor Eli M. Remolona, Jr. said in a statement late Saturday.   

“The BSP will remain data dependent in managing inflation expectations in an effort to avoid the second-round effects of supply shocks,” he added.

Fitch also said the Philippines’ current account (CA) deficit is expected to narrow to $10 billion (-2% of GDP) by 2025 from $18 billion (-4.5% of GDP) in 2022.

“Structural CA deficits will likely persist in the medium term, even as the commodity shock subsides, on strong domestic demand and the infrastructure build-out. The Philippines’ CA surpluses before 2019 largely reflected underinvestment, in our view,” it said. 

In the second quarter, the CA deficit reached $3.6 billion (-3.4% of GDP), which was lower than the $8-billion shortfall a year ago, due to a narrower trade in goods deficit. This brought the first-semester CA deficit at $8.2 billion (-4% of GDP), lower than the $12.1-billion deficit (-6.1% of GDP) recorded in the same period last year.

The debt watcher said the CA deficits will be financed by long-term external borrowings and foreign direct investments.

“We believe the CA deficits will continue to be comfortably financed by long-term external borrowing and FDI. CA deficits are leading to a gradual buildup of net external debt, which we expect to turn positive in 2025, from a creditor position of 6% of GDP in 2022 and 11% in 2019, but the Philippines will compare somewhat favorably with the ‘BBB’ median,” it said.

Meanwhile, Fitch said the government’s projection of a fiscal deficit of 4.1% of GDP by 2025 is mainly hinged on “spending efficiency gains, capital spending reductions, and modest new tax measures, none of which we expect will be realized fully.”

“We see limited potential for the government to outperform its revenue forecasts in the absence of bolder tax reforms, and the government would likely use any excess revenue to accelerate spending, as in recent years. Overall budget balance outturns have tended to be close to targets in recent history,” it added.

Meanwhile, Fitch sees the National Government’s (NG) debt-to-GDP ratio hitting about 61% and the general government’s debt-to-GDP ratio declining to 54% by 2025. 

“This is broadly in line with our projections for the ‘BBB’ median, although the Philippines used to have lower debt levels than the median. Strong nominal GDP growth and narrowing fiscal deficits contribute to a steady downward path for government debt-to-GDP over the medium term,” it added.

The NG’s debt-to-GDP ratio improved to 60.2% at the end of the third quarter, lower than 61% at the end of the second quarter. However, it is still slightly above the 60% threshold considered by multilateral lenders to be manageable for developing economies.

The government is targeting to bring down the ratio to below 60% by 2025.

Economic managers are determined to secure an “A” sovereign credit rating before the end of the Marcos administration.

The Philippines currently falls short of the “A” rating across three major debt watchers, with Moody’s Investors Service rating the country at “Baa2,” S&P Global Ratings at “BBB+,” and Fitch Ratings at “BBB.”

All three have assigned a “stable outlook” for the Philippines, indicating that no rating changes may occur in the next 12 to 18 months. — Keisha B. Ta-asan