Fitch Ratings affirms PHL ‘BBB’ rating

Fitch Ratings affirmed the Philippines’ investment grade rating and kept its “stable” outlook amid the country’s strong growth prospects and minimal exposure to trade tensions.

In a rating action commentary on Tuesday, the credit rater said it affirmed the Philippines’ long-term foreign currency issuer default rating at “BBB,” which indicates low default risk and reflects the economy’s adequate capacity to pay debt.

The debt watcher 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.

“The ‘BBB’ rating and ‘stable’ outlook reflect the Philippines’ strong medium-term growth, which supports a gradual reduction in government debt-to-GDP, and the large size of the economy relative to ‘BBB’ peers,” it said.

However, Fitch said this is “constrained by low GDP (gross domestic product) per head, despite an upward trend. Governance standards are weaker than those of ‘BBB’ peers, though Fitch believes World Bank Governance Indicator (WBGI) scores somewhat overstate this.”

Fitch expects the Philippines’ GDP to grow by 5.6% this year, below the government’s 6-8% target.

It noted Philippine economic growth is being driven by “large public investments in infrastructure, services exports and remittance-funded private consumption.”

“Private demand should be supported by easing inflation and interest rates. However, domestic political uncertainty could affect investment, while global trade tensions will likely drag on growth, in particular indirectly through weaker global demand,” it added.

Real GDP growth is still expected to expand to over 6% in the medium term, Fitch said.

“Our forecast reflects a payoff from investments in infrastructure and a series of structural reforms in recent years to liberalize the economy and foster trade and investment, including through public-private partnerships.”

“Technological change poses risks to the Philippines’ large outsourcing sector, although it is adapting,” it added.

Meanwhile, the credit rater also noted the Philippines is relatively unaffected by global trade uncertainties, citing its lower reciprocal tariffs compared with its neighbors.

“The Philippines is a relatively closed economy, with goods exports of only about 12% of GDP in 2024, mostly electronics and machinery, based on balance of payments statistic. Over 16% of goods exports were to the US.”

The US slapped a 17% reciprocal tariff rate on the Philippines, which was the second lowest in Southeast Asia. However, this higher tariff has been suspended until July.

Fitch said the relatively lower US duties could be an advantage compared with its regional peers.

“The Philippines’ terms of trade could benefit from lower commodity prices or diversion of Chinese exports,” it added.

The debt watcher also cited the country’s “success in taming inflation” and expects further monetary easing this year.

“We expect consumer price inflation to remain around 2% in 2025-2026, at the lower bound of the central bank’s target range,” it said.

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

BSP Governor Eli M. Remolona, Jr. welcomed Fitch’s reaffirmation of the country’s credit rating and stable outlook.

“The BSP took actions to help keep inflation manageable and promote sustainable economic growth. The BSP will continue to do so,” he said in a statement.

Inflation averaged 2.2% in the first quarter, well within the central bank’s 2-4% target.

“Monetary financing of the fiscal deficit during the pandemic was limited and reversed more quickly than in some peers. The government’s response to the commodity-price shock was measured, for example, in resisting calls for widespread fuel subsidies,” according to Fitch.

Fitch expects a slower fiscal consolidation path, given the “government’s overriding focus on growth and a less permissive domestic political environment.” 

The government is targeting to gradually bring down its deficit-to-GDP from 5.3% this year to 3.7% in 2028.

Fitch sees the country’s general government deficit narrowing to 3.6% next year and its central government deficit hitting 4.6% by 2026.

The general government debt-to-GDP ratio is also seen to remain mostly unchanged at 54% to 55% from 2025 to next year.

“Strong nominal GDP growth and narrowing fiscal deficits contribute to our forecast of a downward path for government debt-to-GDP over the medium term,” it added.

Meanwhile, Fitch also said the Philippines’ current account  deficit will remain “broadly unchanged” from this year to 2026.

“Strong domestic demand, partly related to public infrastructure development, will continue to drive import growth, offset by lower hydrocarbon import prices and growth in remittances and service exports.”

Fitch also cited factors that could individually or collectively lead to a negative rating action, such as the failure to maintain stable debt-to-GDP levels; reduced confidence in medium-term economic growth; and a deterioration in foreign currency reserves.

On the other hand, factors that could support an upgrade are sustained reductions in the government’s debt levels, stronger-than-anticipated economic growth and the strengthening of governance standards, among others.

The BSP said the Fitch investment grade rating “signals low credit risk and affordable access to funding.”

“This enables a country to allocate funds to socially beneficial initiatives and programs,” it added. – Luisa Maria Jacinta C. Jocson, Senior Reporter