Fitch Affirms the Philippines at 'BBB-'; Outlook Positive
(The following statement was released by the rating agency) HONG KONG, March 29 (Fitch) Fitch Ratings has affirmed the Philippines' Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at 'BBB-' with a Positive Outlook. The ratings on the Philippines' senior unsecured foreign and local-currency bonds are also affirmed at 'BBB-' and 'F3'. The Short-Term Foreign- and Local-Currency IDRs are affirmed at 'F3'. The Country Ceiling is affirmed at 'BBB'. KEY RATING DRIVERS The Philippines' ratings reflect its continued strong and consistent growth performance, a robust net external creditor position and government debt levels that are lower than the median of peers in the 'BBB' rating category. The ratings remain constrained by relatively weak governance standards, a narrow government revenue base, and levels of per capita income and human development that are below the 'BBB' median. The rating action reflects the following factors: The Philippines' strong economic growth is a rating strength. Real GDP grew by 6.8% in 2016, up from 5.9% in 2015, supported by continued strong growth in private consumption spending and investment. Private consumption was supported by the reliable inflow of remittances, which comprised about 10% of GDP and grew by around 5% in 2016. Growth in investment spending was driven by a pick-up in infrastructure investment. Sustained strong performance of the business process outsourcing (BPO) sector also remained supportive of employment and domestic demand. The Philippines' average real GDP growth for the five years to end-2016 was 6.6%, well above the 'BBB' median of 3.2%. Fitch expects the economy to sustain its strong growth momentum, with GDP forecast to increase by 6.8% and 6.7% in 2017 and 2018, respectively. Fitch forecasts inflation to increase to 3.3% in 2017, up from 1.8% at end-2016, but remain within the central bank's target of 2%-4%. The Philippines in May 2016 elected Rodrigo Duterte as its new president. The president's election campaign focused on improving law and order and promoting social justice, and he has maintained those priorities since taking office. Macroeconomic performance has remained strong despite the increase in incidents of violence associated with the administration's campaign against the illegal drug trade while domestic political stability has been maintained. Fitch will continue to monitor the impact of the president's campaign against drugs on economic performance, financing flexibility and capital flows. In terms of the broader policy agenda, the new administration has adopted a 10-point socio-economic plan, which signals broad continuity of policies under the previous administration. The Philippines is a strong net external creditor. The Philippines' current account has been in surplus since 2003, which has led to a steady increase in its foreign-exchange reserves and supports its net external creditor position. At end-2016, the Philippines net external creditor position was close to 13% of GDP, compared with the 'BBB' median of a net debtor position of 0.7% of GDP. However, the Philippines' current account narrowed significantly to 0.2% of GDP at end-2016 from 2.5% at end-2015. This was primarily due to an increase in capital goods imports and sluggish export growth, which led to a sharp increase in the trade deficit. Fitch expects the current account to move into a modest deficit over 2017-2018 as increased spending on infrastructure is likely to drive strong growth in capital-goods imports. The Philippines' current account will, however, remain supported by a steady inflow of remittances, which increased by about 5% in 2016, and strong growth in services receipts related to the BPO industry. Further, Fitch estimates that foreign-exchange reserves will continue to cover close to 8 months of current external payments over 2017-2018. Philippines' net external creditor position and healthy reserve position represent effective buffers against external shocks. The Philippine central bank's monetary and exchange rate policies are effective. The Bangko Sentral ng Pilipinas has been able to maintain inflation at modest levels, and the foreign exchange managed-float regime allows the peso to act as a cushion against external shocks, as evidenced by the downward adjustment in the currency following portfolio outflows in 2016. The upcoming transition to a new central bank governor will be important in the context of policy stability and credibility. The government's debt remains below the 'BBB' median. Fitch expects the Philippines' fiscal deficit to widen in 2017-2018 to around 3% of GDP from 2.4% of GDP in 2016. As a result, Fitch expects the government debt-to-GDP ratio to increase modestly over this period, although over the medium-term this ratio is forecast to gradually decline. The expectation of a wider fiscal deficit primarily reflects the government's plan to increase spending on infrastructure. The authorities in 2016 revised the deficit ceiling to 2.7% of GDP from 2%, and further raised it to 3% of GDP for 2017.Fitch estimates the Philippines' general government debt at 35.6% of GDP at end-2016, which was below the 'BBB' median's 41.1%. The Philippines' fiscal profile remains constrained by a narrow government revenue base. Central government revenues at end-2016 stood at 15.2% of GDP although the agency estimates general government revenue at closer to 22% of GDP. However, this is still below the 'BBB' median of 30% and the 'A' median of 35.5%. The authorities plan to address this weakness by implementing an ambitious comprehensive tax reform programme, with the authorities estimating that the first part of this reform package will add revenue of 2% of GDP. However, in Fitch's view, there are execution risks that could affect the extent of the reforms and their implementation. The Philippines' average income levels and standards of human development continue to lag many of its peers in the 'BBB' rating category. The Philippines' per capita income level at market exchange rates at end-2016 was USD2,968, compared with the 'BBB' median of USD9,654. Further, on the United Nations Human Development Index, Philippines is ranked in the 39th percentile while the 'BBB' median was the 68th percentile. Banking sector liquidity, capitalisation levels and asset quality ratios remain strong. The banking sector implemented Basel III minimum capital standards in full at the beginning of 2014. Loan growth in 2017 is likely to rise to the mid to high teens, with most of the growth in lending coming from increased demand from infrastructure, real estate and other business investment sectors. Continued strong credit growth could generate concerns of over-heating, and potential credit bubbles, but we believe that the authorities will be able to adjust policy to address these risks, including the implementation of macroprudential policy measures. SOVEREIGN RATING MODEL (SRM) and QUALITATIVE OVERLAY (QO) Fitch's proprietary SRM assigns the Philippines a score equivalent to a rating of 'BBB-' on the Long-Term Foreign-Currency IDR scale. Fitch's sovereign rating committee did not adjust the output from the SRM to arrive at the final Long-Term Foreign-Currency IDR. Fitch's SRM is the agency's proprietary multiple regression rating model that employees 18 variables based on three-year centred averages, including one year of forecasts, to produce a score equivalent to a Long-Term Foreign-Currency IDR. Fitch's QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM. RATING SENSITIVITIES The main factors that individually or collectively might lead to positive rating action are: - Continued strong growth without the emergence of imbalances and maintenance of external buffers that are resilient to potential negative external developments, including increased protectionism. - Further broadening of the government's revenue base that lends greater stability to government finances, for example reflecting the successful passage of the government's proposed tax reforms. - Strengthening of governance standards and implementation of reforms that support growth and improve structural indicators The rating Outlook is Positive. Hence Fitch does not anticipate a material probability of negative action over the forecast period. However, the main factors that could see the ratings revert to Stable Outlook are: - Deterioration in governance standards or political stability, for example, through an escalation of violence associated with the administration's campaign against the illegal drug trade that exerts a negative impact on external finances, economic growth or financial stability. - Weakening of external buffers in the face of negative external developments. - Instability in the financial system, possibly triggered by a sustained period of excessive credit growth. KEY ASSUMPTIONS - Global economic assumptions are consistent with Fitch's latest Global Economic Outlook. Contact: Primary Analyst Sagarika Chandra Associate Director +852 2263 9921 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central Hong Kong Secondary Analyst Mervyn Tang Director +852 2263 9944 Committee Chairperson Tony Stringer Managing Director +44 20 3530 1219 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Country Ceilings (pub. 16 Aug 2016) here Sovereign Rating Criteria (pub. 18 Jul 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1021266 Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. 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