Fitch adjusts upward the Philippines’ BBB outlook to positive; Debt watcher cites sound macroeconomic environment, fiscal reforms

Fitch Ratings has adjusted upward the outlook on its BBB investment grade credit rating for the Philippines from stable to positive less than a week after Japan-based Rating and Investments Information Inc. (R and I) upgraded the country's rating from BBB to BBB+.

R and I joins Standard and Poor's (S and P) Global and Japan Credit Rating Agency (JCR) in assigning to the Philippines a BBB+ rating, just a notch away from the sterling A scale and a step above Fitch's.

The Fitch announcement signals a potential upgrade to BBB+ within the next 12 to 18 months. In a report released Tuesday, Fitch said, The outlook revision reflects Fitch's expectations of continued adherence to a sound macroeconomic policy framework that will support high growth rates with moderate inflation, progress on fiscal reforms that should keep government debt within manageable levels and continued resilience in its external finances.

Finance Secretary Carlos Dominguez III said, The Philippines looks forward to the further alignment of its credit rating to its level of creditworthiness as indicated by a decreasing debt-to-GDP ratio and positive economic prospects from record investment levels in infrastructure and human capital.

In its report, Fitch said the Philippines will remain among the fastest growing economies in the Asia-Pacific region in 2020-2021. It further said it expects GDP to grow by 6.4 percent this year and 6.5 percent next year, faster than last year's 5.9 percent. Growth drivers will be strong private consumption and rising public infrastructure spending, it added.

The debt watcher recognized sound economic policy making in the Philippines as evidenced by the government's healthy fiscal position and implementation of tax reforms, which will help ensure that public debt will remain manageable over the long haul.

For over three years, the Duterte administration has further improved our country's macroeconomic fundamentals. We have pursued an aggressive investment program while maintaining fiscal discipline. The upgrades in our ratings reflect an exciting inclusive narrative anchored on robust growth despite headwinds and a declining poverty incidence. President Duterte has exercised bold leadership in carrying out game-changing reforms, such as tax reform to sustain high growth and improve the living standards of our people, Dominguez said.

Fitch noted that inflation slowed to 2.5 percent in 2019, partly on account of the enactment of the law liberalizing rice imports. Recognizing the risks to the growth outlook, the agency expects inflation to stay within the government's target range of 2 to 4 percent, with the BSP's timely and responsive monetary policy decisions.

Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno said the positive outlook from Fitch is an encouraging development. We deserve a credit rating upgrade from Fitch, and the 'positive' outlook should soon lead us there. As part of our Road to 'A' agenda, we are more vigorously communicating the economic milestones as well as the governance and institutional strengthening the Philippines achieved in recent years. At the same time, we are meticulously tracking how the economy is progressing in terms of achieving a wide array of metrics that will solidify our position as an 'A' rated economy in two years, Diokno said.

The Road to A agenda is the initiative of an inter-agency committee, co-chaired by the BSP and DOF.

An 'A' scale rating is not an end itself, with the overarching objective being maintaining macroeconomic stability and making growth truly inclusive. Having said that, a rating within the 'A' territory will place the Philippines in the radar of more investors, which bodes well for attracting more job-generating investments, the BSP Governor added.

Dominguez noted that a higher credit rating is crucial to the quest for a more inclusive growth because it will lower borrowing costs for the government and private sector investors, and eventually lower interest rates for the loans of ordinary Filipinos. Both will spur greater investments, which, in turn, will mean faster growth and more jobs.

Socioeconomic Planning Secretary Ernesto M. Pernia said, The Philippines is actively paving the way toward its next stages of economic development, and the gains should be acknowledged by credit rating agencies like Fitch. Over the last few years, we have posted notable strides in making our economic growth more inclusive, as evidenced by the significant declines in the unemployment rate and poverty incidence. Moving forward, we expect this momentum to be sustained, as we invest more in our future. Heightened efforts to provide an enabling environment for science and technology innovation ecosystem, for instance, will help the economy leapfrog toward its long-term goal of becoming a high-income economy with zero poverty, and globally competitive.

On the external front, Fitch said the Philippines remains less vulnerable to capital outflows compared to its rating peers and that it expects the Philippines' external finances to remain resilient. It noted the increase in international reserves to US$88 billion in 2019 partly due to generally stable foreign direct investment (FDI) inflows.

Fitch said it will upgrade the Philippines' BBB rating if the economy sustains solid economic growth without imbalances, if improvements in government's finances continue, partly as a result of tax reforms, and if governance standards further strengthen.

Fitch's BBB rating with a positive outlook compares with the BBB rating with a stable outlook from Moody's Investors Service and Korea-based NICE Investors Service.

Source: Bangko Sentral ng Pilipinas