Fitch Ratings has affirmed the Republic of the Philippines’ Long-term foreign and local currency Issuer Default ratings (IDRs) at ‘BB’ and ‘BB+’, respectively. The Outlook on the ratings is Stable. The agency also affirmed the Short-term IDR at ‘B’ and the Country Ceiling at ‘BB+’.
“While the Philippines has not been directly exposed to some of the most serious aspects of the international financial crisis, including, for example, severe stresses affecting the domestic banking system, it is not impervious to the deterioration in global economic growth prospects,” says James McCormack, Head of Asia Sovereigns at Fitch.
Based on a sharp reduction in exports, which is expected to be only partially offset by weaker imports, and a forecast 6.8 percent decline in remittances, the agency forecasts Philippine GDP growth will reach only 0.1 percent in 2009. In response to the effects of the global recession on the Philippine economy, the government has initiated a PHP330bn (4.1 percent of forecast 2009 GDP) Economic Resiliency Plan focused primarily on infrastructure investment and social spending.
The main national government budget implications of the Plan are PHP160bn in additional spending and PHP40bn in tax cuts, with a 2009 deficit target of PHP229bn (excluding privatisation). Fitch forecasts a fiscal deficit of PHP271bn (excluding PHP5bn in privatisation receipts), equivalent to 3.5 percent of GDP. “The fall in tax revenue in the first quarter will be very difficult to make up in the remainder of the year as the economy slows,” adds McCormack. government revenue (excluding privatisation) was down by 4 percent in Q1, marking the weakest Q1 revenue outturn in 22 years. Fitch assumes there will be further fiscal policy adjustments as the year progresses, and the agency expects spending to be slightly below the current target by end of the year.
The forecast increase in the Philippine fiscal deficit in 2009 is in line with those of other ‘BB’-rated sovereigns, as is the deficit level itself. In terms of government debt, however, the Philippines compares unfavourably with its rating peers. In 2008, the Philippine national government debt/GDP ratio was 56.3 percent (consolidated general government debt is estimated at about 46 percent of GDP), compared to the ‘BB’ consolidated general government debt median of 30.6 percent. The debt/revenue ratio is even more telling, with the Philippines at 360 percent versus the peer median of 141 percent. Fitch has long considered the Philippines’ low government revenue base – among the lowest of all rated sovereigns – to be a fundamental rating weakness. With a much weaker economy and elections due next year, the agency does not believe revenue enhancement will be a short-term policy priority.
Consequently, if forecast increases in spending are not reversed once the economy begins to recover, or revenue collection is not stepped up considerably, there is a risk that Philippine government debt ratios may deviate further from the ‘BB’ medians, with possible negative rating implications. Overseas remittances were USD16.4bn in 2008 (10 percent of GDP), providing critical support to economic growth by supplementing household income.
Remittance inflows also more than offset the USD12.6bn trade deficit, resulting in a USD4.2bn current account surplus. Remittances were still growing yoy in February 2009, but they peaked in June 2008 and have been trending lower, consistent with the state of the global economy. Fitch expects remittances to continue to fall gradually in 2009. Recent dramatic declines in exports are expected to moderate, but still result in a contraction of 20 percent for the year. Taking changes in remittances and the trade balance into account Fitch forecasts a halving of the current account surplus this year to USD2.1bn.
Combining the current account balance and external amortisation payments, the Philippine gross external financing requirement for 2009 is forecast at USD2.8bn, equivalent to 7.3 percent of end-2008 foreign exchange reserves. The ‘BB’ median is 51 percent, confirming the comparative external sector strength of the Philippines, even with much weaker exports and a moderate fall in remittances.