Metro Manila (CNN Philippines) — Fitch Ratings announced on Thursday that it has raised its outlook on the Philippines to “Positive.” The credit watcher said that “Governance standards and competitiveness indicators, as measured by international organisations, have shown steady improvement through the Aquino administration.”
Its ratings outlook indicates the direction that a rating is likely to move over a one to two-year period.
The organization maintained the country’s Long-Term Foreign and Local Currency issuer default ratings (IDRs) at “BBB-” and “BBB,” respectively.
“Indicators for corruption, transparency and economic freedom have also improved substantially. Evidence that governance improvements can be sustained beyond the next election cycle would be positive for the credit,” it added.
Fitch also noted that the country’s global competitiveness, as ranked by the World Economic Forum, has risen to a level comparable to “BBB”-rated peers. “Economic growth continues to outperform ‘BBB’-rated peers, and favourable demographics support the medium-term growth outlook.”
Likewise, the credit watcher cited the country’s external finances as a key contributor to its credit strength. “The Philippines has run current account surpluses since 2003, underpinned by high levels of worker remittances and revenue from the business process outsourcing industry.”
“Fitch expects the Philippines’ strong external finances will provide resilience against potential shifts in global investor sentiment, for example following the tightening of U.S. monetary policy.”
“While a positive credit rating action seems abstract to most, its benefits are felt in the most concrete terms. Businesses are able to borrow more easily, and everyday Filipinos find better home and car loans, for example,” explained Finance Secretary Cesar Purisima.
“Standing on ever firmer fiscal positions allows us to better withstand economic turbulence, an outcome not many of our neighbors can say they are enjoying at the moment. This is a layer of protection we’ve worked hard to maintain for our most vulnerable, as well as the middle class we want to keep growing,” he added.
“This is a layer of protection we’ve worked hard to maintain for our most vulnerable, as well as the middle class we want to keep growing.”
The credit watcher said that the Philippines has “low and falling public debt.” Relative to the “BBB” average to 42.4 percent of gross domestic product (GDP) in 2014, it said that the country’s general government debt stood at 36.4 percent of GDP during the same year.
However, Fitch also noted weaknesses in the country’s credit condition, such as the country’s “narrow government revenue base,” which “reduces its ability to manage fiscal balances in the event of a shock.”
“The Philippines’ general government revenue, based on unconsolidated figures provided by the authorities, is 21.5% of GDP in 2014. This is low relative to the ‘BBB’-rated median of 28.6%, typically calculated from consolidated figures.”
Likewise, it also cited “low” per capita incomes as structural weaknesses. “GDP per capita income at USD 2,836 in 2014 is low compared with the ‘BBB’ median of USD10,654. Gross national income per capita is higher due to relatively large inflows of remittances from overseas Filipino workers, but still below ‘BBB’ peers.”
Fitch has also had difficulty assessing the effect of credit growth on the real estate market, citing a lack of data on property and affordability indicators.
“There is limited clarity over macro-prudential risks stemming from the real estate market. Private sector credit growth has moderated from 19.9% YoY [year-on-year] at end-2014 to 14.1% in June 2015, but still growing at a brisk pace.”
“Sharp market volatility witnessed recently across the globe posed threats of spillover effects on the real sector of economies. What makes the Philippines an outperformer are its strong fundamentals, which entice short- and long-term capital once markets see through the temporary noise,” explained Bangko Sentral ng Pilipinas (BSP) Governor Amando Tetangco Jr.
