Fitch: below-investment grade rating for PH stays
Despite efforts of the economic managers to highlight the government's governance and anti-poverty efforts, credit agency Fitch Ratings decided to keep its current below-investment grade rating, at least for now

MANILA, Philippines – Despite efforts of the economic managers to highlight the government’s governance and anti-poverty efforts, credit agency Fitch Ratings decided to keep its current below-investment grade rating.

In a June 19 release, Fitch said it maintained the Philippines’ long-term foreign currency rating at ‘BB+’, and the local currency rating at ‘BBB-‘. The outlook for both ratings is stable, which means no adjustment in the actual rating is expected sometime soon. 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, which could make the cost of borrowings cheaper and could be considered as a vote of confidence for the Aquino administration.  

“The Aquino administration’s reform agenda has focused on tackling perceived shortcomings in governance and poverty and has the potential to address long-standing structural weaknesses. However, it will likely take time to feed through to the sovereign credit profile,” the ratings firm said in a statement.

“Reforms aimed at broadening the revenue base to create fiscal space for greater public investment could also prove favorable to longer-term growth prospects. However, those benefits are also expected to take time to emerge,” it added.

Nonetheless, the current credit rating highlights “a strong external finances, a track record of macroeconomic stability, favorable 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.

The agency highlighted the following positive aspects of the Philippine economy:

  • GDP growth to accelerate to 5.5% in 2012 from 3.9% in 2011
  • average inflation is expected to moderate to 3.5% year-on-year from 4.7% y-o-y (based on 2006 prices)
  • moderate fiscal deficit of 2.6% of GDP expected for 2012
  • the pick-up in investment to 21.7% of GDP brings it in line with the ‘BB’ range peer median
  • general government debt fell to 42% of GDP at end-2011, in line with ‘BB’ range peers. The ratio is expected to remain on a downward trajectory.
  • debt/revenue ratio of 300% remains well above the ‘BB’ range median of 163%

It also noted the following challenges:

  • the country has some way to go to narrow the gap in credit and structural fundamentals with peers. Average incomes are low (USD2,400 against a ‘BB’ range median of USD4,200) the level of human development is poor
  • healthy capital adequacy ratios (17.3% versus the ‘BB’ range median of 15.3%) and the small size of the banking system relative to the domestic economy (private sector credit at 32% of GDP) mitigate the risks from the sector for the sovereign credit profile
  • low fiscal revenue base is a drag on the credit profile. The government raised just 14% of GDP in revenue in 2011
  • administrative improvements to revenue growth has begun to exceed nominal GDP growth, but need to be sustained if the government is to achieve its medium-term objective of a revenue/GDP ratio of 15.9% by 2016

The Philippines is one of the most active bond issuers among emerging markets. An investment-grade rating could pave the way for the influx of more foreign investors as some are restricted to place their clients’ funds in assets that are rated below investment-grade. –