Fitch affirms PH credit rating; outlook stable
06/19/2012
MANILA, Philippines - Fitch Ratings on Tuesday affirmed the Philippines' credit rating, citing strong external finances, favorable economic prospects and a track record of macroeconomic stability.
Fitch maintained Manila's long-term foreign currency rating at 'BB+', while local currency rating at 'BBB-'. The outlook for both ratings is stable.
"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," he added.
Fitch said the prospects for the Philippine economy are generally favorable in the near term. Fitch expects Philippine GDP growth to rise 5.5% in 2012, from 3.9% in 2011.
"Lower inflation and a moderate fiscal deficit (2.6% 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 ($2,400 against a 'BB' range median of $4,200) and the level of human development is poor. However, the recent pick-up in investment to 21.7% of GDP, bringing it in line with the 'BB' range peer median, is encouraging and could support stronger growth if sustained," the report said.
Credit growth in the Philippines remains strong, but Fitch said if this is sustained, it could eventually pose risks to financial and economic stability. However, it pointed out that the healthy capital adequacy ratios and relatively small banking system could mitigate risks.
While the Aquino government has began implementing reforms to address issues of governance and poverty, Fitch said 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," it said.
Fitch estimated the general government dropped to 42% of GDP at the end of 2011, in line with 'BB' range peers, and expects it to continue its downward trajectory.
"However, a low fiscal revenue base is a drag on the credit profile - the sovereign raised just 14% of GDP in revenue in 2011," it said.
The Philippines' debt-to-revenue ratio of 300% continues to be above the 'BB' range median of 163%. There has been administrative improvements that helped revenue growth to exceed nominal GDP growth, but Fitch said this should be sustained if the government wants to achieve its objective of a revenue/GDP ratio of 15.9% 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," Fitch said.
Fitch had raised the Philippines' credit rating to 'BB+', within one notch of investment grade in June 2011.
Philippine economic officials have continued to make a pitch for the country's rating to be upgraded to investment grade.
The Philippines is one of Asia's most prolific offshore bond issuers. An investment-grade rating would lower its cost of borrowing and widen its base of potential investors, as some funds have restrictions on holding sub-investment grade debt.
"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," he added.
Fitch said the prospects for the Philippine economy are generally favorable in the near term. Fitch expects Philippine GDP growth to rise 5.5% in 2012, from 3.9% in 2011.
"Lower inflation and a moderate fiscal deficit (2.6% 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 ($2,400 against a 'BB' range median of $4,200) and the level of human development is poor. However, the recent pick-up in investment to 21.7% of GDP, bringing it in line with the 'BB' range peer median, is encouraging and could support stronger growth if sustained," the report said.
Credit growth in the Philippines remains strong, but Fitch said if this is sustained, it could eventually pose risks to financial and economic stability. However, it pointed out that the healthy capital adequacy ratios and relatively small banking system could mitigate risks.
While the Aquino government has began implementing reforms to address issues of governance and poverty, Fitch said 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," it said.
Fitch estimated the general government dropped to 42% of GDP at the end of 2011, in line with 'BB' range peers, and expects it to continue its downward trajectory.
"However, a low fiscal revenue base is a drag on the credit profile - the sovereign raised just 14% of GDP in revenue in 2011," it said.
The Philippines' debt-to-revenue ratio of 300% continues to be above the 'BB' range median of 163%. There has been administrative improvements that helped revenue growth to exceed nominal GDP growth, but Fitch said this should be sustained if the government wants to achieve its objective of a revenue/GDP ratio of 15.9% 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," Fitch said.
Fitch had raised the Philippines' credit rating to 'BB+', within one notch of investment grade in June 2011.
Philippine economic officials have continued to make a pitch for the country's rating to be upgraded to investment grade.
The Philippines is one of Asia's most prolific offshore bond issuers. An investment-grade rating would lower its cost of borrowing and widen its base of potential investors, as some funds have restrictions on holding sub-investment grade debt.
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