Fitch Ratings has revised the Philippines’ Outlook to Positive from Stable and affirmed its Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘BBB’. In its statement dated 11 February 2020, the credit rating agency noted the Philippines’ “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.”
Fitch projects that the Philippines‘ growth will accelerate to 6.4% in 2020 and 6.5% in 2021, after the slowdown to 5.9% in 2019. Fitch projects that the Philippines will remain among the fastest-growing economies in the Asia-Pacific region in 2020-2021, well above the current ‘BBB’ median.
The country’s strong economic performance is driven by strong private consumption and rising public infrastructure investment. Overseas remittance inflows, decreasing unemployment, accommodative monetary policy should support continued private consumption demand.
Fitch also stated that the Philippine government’s ongoing reforms to strengthen institutional effectiveness, human capital and the business environment “should lead to a further improvement in the Philippines’ structural metrics over time”. These reforms include the Philippine Identification System Act of 2018, the New Central Bank Act, increased coverage under the National Health Insurance Program and the establishment of the Presidential Anti-Corruption Commission.
Fitch expects the Philippines’ fiscal profile to improve over the coming year, supported by continued progress on tax reforms which could raise tax revenues to about 16.9% of GDP from an estimated 16.7% in 2019. The tax reforms could keep government debt levels low, even as the administration’s infrastructure programme continues. The government has increased allocation for infrastructure in the 2020 budget to PHP972.5 billion, about 6.9% higher than the previous year.
Fitch noted that the Philippines’ foreign-exchange reserves increased to about USD 88 billion in 2019 and expects reserve coverage to remain strong. The Philippines also remains less vulnerable to large capital outflows compared with some of its neighbours in the region due to lower non-resident holdings of domestic government debt. Fitch expects the Philippines to remain a net external creditor compared with the peer median’s net debtor position.
Structural indicators such as per capita income, governance standards and human development are weaker than that of peers, but are improving. The Philippines’ per capita income, estimated by Fitch at USD3,330 at end-2019, is far below the ‘BBB’ median, and it also scores much lower than peer medians on the World Bank’s governance indicators.
The Philippines improved to 94th place from 124th in 2018 in the latest Ease of Doing Business Index ranking. Fitch believes that FDI flows will remain strong for the time being.
Inflation slowed to 2.5% in December 2019, after peaking at 6.7% in April 2019, which was facilitated by passage of the rice tariffication law that lifted import restrictions on rice. The BSP cut its policy rate by 25bp on 6 February 2020 which, after the 75bp cut in 2019, brings the rate to 3.75%. Inflation will likely stay within the BSP’s target range of 2%-4%.
Fitch expects the current account deficit to widen to about 2.4% of GDP in 2020 from an estimated 1.5% in 2019. Import demand will rise with the government’s infrastructure push. However, rising service exports related to the business-process outsourcing sector and steady remittances should keep the deficit from widening substantially. The impact of the coronavirus outbreak may have a negative impact on tourism, depending on the severity and duration, but at less than 3% of GDP tourism is a relatively small part of the economy. Net FDI for 2019 is projected to reach USD7.5 billion, or about 2.1% of GDP, and equity FDI flows should continue to finance about a third of the current account deficit.
The Philippine banking sector’s asset-quality metrics remain relatively benign, notwithstanding some modest deterioration in 2019. Nonetheless, domestic private-sector leverage has increased in recent years. A sustained surge in property prices, especially if coupled with a significant acceleration in credit growth, could pose downside risks to the banks.
Fitch concluded that the economic environment is likely to remain broadly supportive in the near term, and underpins our stable banking sector outlook. The commercial banks’ sector-wide consolidated total capital-adequacy ratio of 16% as of September 2019 also provides satisfactory loss-absorption buffers against moderate credit stresses.END