Fitch Ratings affirmed the Philippines’s Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) at ‘BB+’ and ‘BBB-’, respectively. The Outlook for both ratings is Stable. The Country Ceiling has also been affirmed at ‘BBB-’, and the Short-Term Foreign Currency IDR at ‘B’.
“The ratings and Outlook are supported by strong external finances, a track record of macroeconomic stability, favourable economic prospects, and falling public debt ratios,” said Philip McNicholas, director in Fitch’s Asia-Pacific Sovereign Ratings group. “However, structural weaknesses including low average income, a weak business environment and a low fiscal revenue take weigh on the credit profile.”
The Philippines enjoys broadly favourable near-term economic prospects. Fitch forecasts GDP growth to accelerate to 5.5 percent in 2012 from 3.9 percent in 2011, while average inflation is expected to moderate to 3.5 percent yoy from 4.7 percent yoy (based on 2006 prices). Lower inflation and a moderate fiscal deficit (2.6 percent of GDP expected for 2012) suggest scope for policy flexibility to respond to adverse economic shocks, should they materialise. However, the country has some way to go to narrow the gap in credit and structural fundamentals with peers. Average incomes are low (USD2,400 against a ‘BB’ range median of USD4,200) and the level of human development is poor. However, the recent pick-up in investment to 21.7 percent of GDP, bringing it in line with the ‘BB’ range peer median, is encouraging and could support stronger growth if sustained.
Credit growth accelerated in 2011 and has remained strong so far in 2012, supported by abundant domestic liquidity. Strong recent real credit growth, if sustained, could eventually pose risks to financial and economic stability. However, healthy capital adequacy ratios (17.3 percent versus the ‘BB’ range median of 15.3 percent) and the small size of the banking system relative to the domestic economy (private sector credit at 32 percent of GDP) mitigate the risks from the sector for the sovereign credit profile.
The Aquino administration’s reform agenda has focused on tackling perceived shortcomings in governance and poverty and has the potential to address long-standing structural weaknesses. However, it will likely take time to feed through to the sovereign credit profile. Reforms aimed at broadening the revenue base to create fiscal space for greater public investment could also prove favourable to longer-term growth prospects. However, those benefits are also expected to take time to emerge.
Fitch estimates general government debt fell to 42 percent of GDP at end-2011, in line with ‘BB’ range peers. The ratio is expected to remain on a downward trajectory. However, a low fiscal revenue base is a drag on the credit profile – the sovereign raised just 14 percent of GDP in revenue in 2011. The Philippines’ debt/revenue ratio of 300 percent remains well above the ‘BB’ range median of 163 percent. Following administrative improvements revenue growth has begun to exceed nominal GDP growth. However, such gains need to be sustained if the government is to achieve its medium-term objective of a revenue/GDP ratio of 15.9 percent by 2016.
Strengthening the fiscal revenue base, and generating the resources to meet the administration’s public investment and social spending plans, would be positive for the ratings. Likewise, a longer track record of improvements in governance and the business environment leading to stronger investment and firmer medium-term growth prospects would put upward pressure on the ratings, if sustained over time. Conversely, fiscal slippage would be negative for the credit profile, as would a reversal of recent progress on governance or the emergence of risks to basic political stability.