Category : Press Release
Date : December 11, 2017
Agency : Investor Relations Office
Title : PH bags credit rating upgrade from Fitch - Int’l debt watcher favorably cites PH’s macroeconomic outperformance, Duterte’s bold infra, tax reform plan
Article : Fitch Ratings has upgraded the long-term foreign currency rating of the Philippines to “BBB” from the minimum investment grade of “BBB-.”



The new rating is assigned a “stable” outlook, which means there are no pressing factors that could trigger an adjustment within the near term.



After over four years of status quo, the international debt watcher has finally acknowledged the further strengthening of the Philippines’ credit profile. This is the result of a long series of critical structural changes, including rising share of investments to the country’s gross domestic product, surge in manufacturing sector growth, better fiscal management that has resulted in rising revenues and declining debt burden, significant increase in public investments in infrastructure and social services, and broad range of financial sector reforms that have further strengthened the banking system, among others.



In its report released late evening of Sunday, Fitch cited the Duterte administration’s bold infrastructure development agenda and its comprehensive tax reform program, both of which are expected to bring material benefits to the Philippine economy in the years ahead.



According to Fitch: “Strong and consistent macroeconomic performance has continued, underpinned by sound policies that are supporting high and sustainable growth rates.” It added that the Philippines is expected to remain among the fastest growing economies in Asia Pacific, with GDP growth likely to hit 6.8 percent next year and in 2019.



Credit ratings are a measure of a country’s (or any rated entity’s) willingness and ability to pay debts as they fall due. Because rating agencies take into account many factors in assessing a sovereign’s credit worthiness including its macroeconomic fundamentals and institutional strength, higher ratings help to improve a country’s image before the local and international investor communities. Higher ratings, therefore, also contribute to a more robust assessment of investors of the country’s growth prospects and investment environment.



The country’s economic officials welcomed the much awaited upgrade from Fitch.



Finance Secretary Carlos Dominguez III said: “We are pleased that Fitch is finally convinced that the Philippine economy now is much stronger and more resilient than in 2013, when they granted the Philippines its first investment grade credit rating of BBB-.”



“Our macroeconomic fundamentals are on par with, if not better than, those of higher-rated sovereigns and continue to improve. Our economic growth in recent years has been one of the fastest in the region and among our rating peers. Our fiscal position is much stronger now on account of administrative measures we are implementing to improve revenue collection efficiency of the BIR and BOC, and the budget and expenditure reforms being pursued by DBM,” Dominguez added.



“Our growth prospects are also brighter compared with those of our neighbors and peers. The Duterte Administration is fast-tracking crucial structural reforms – including the Comprehensive Tax Reform Program, the bold infrastructure development agenda, and liberalization of the investment regime. All this will help accelerate economic expansion, spread development, and increase income in lagging regions. While we are not targeting ratings per se, I am confident that with these reforms, there will be more positive rating actions in the next couple of years,” Dominguez also said.



Under the Duterte administration’s infrastructure development agenda, dubbed “Build Build Build,” the government programs to spend between $160 billion and $170 billion on infrastructure projects all over the country until 2022.



The first package of the Comprehensive Tax Reform Program, which is undergoing deliberations at the Bicameral Conference Committee, seeks to cut personal income tax rates, thereby increasing take-home pay of Filipino workers; it also seeks to lift certain value-added tax exemptions, impose higher excise tax on oil and automobile, and slap a tax on sugar-sweetened beverages.



On a net basis, based on estimates of Fitch, the first package would boost government revenues in the amount equivalent to 0.5 to 0.8 percent of the country’s gross domestic product in 2018.





Fitch likewise recognized the prudence of the appointment of Nestor A. Espenilla, Jr. as the new head of the BSP. Espenilla, who assumed the BSP’s top post in July, has been a career central banker for over 30 years now.



“The recent appointment of the new central bank Governor from within the Bangko Sentral ng Pilipinas (BSP) has provided continuity and supports monetary policy credibility,” Fitch said. With him at the helm of the BSP, Fitch expects inflation to remain well managed and to stay within the target band of 2.0 to 4.0 percent. It likewise expects the BSP’s policy of allowing exchange rate flexibility to help preserve the country’s gross international reserves (GIR).



BSP Governor Nestor Espenilla, Jr. said: “The rating upgrade from Fitch is a recognition of the positive transformation that is taking place in the Philippines. The productive capacity of the economy is expanding. This is making possible higher GDP growth that is sustainable. Inflation is low and stable while the balance of payments remains very manageable. The domestic financial system’s resources and profitability have continued to increase, governance standards and risk management systems have been enhanced, and significant inroads toward financial inclusion is being achieved.”



“We expect this virtuous cycle to continue. BSP will remain committed to our crucial mandate of price and financial stability, which are necessary to further accelerate economic growth in the country. At the same time, we will vigorously pursue game-changing financial sector reforms that support economic growth and to ensure that the benefits of a fast- growing economy are felt by more Filipinos,” Espenilla added.



The latest credit-rating upgrade by Fitch, which had assigned the minimum investment grade of BBB- to the Philippines since March 2013, has come following sustained improvements in the country’s macroeconomic fundamentals.



The Philippines’ average GDP growth accelerated from 5.2 percent in the period 2003-2012 prior the country’s attainment of investment grade credit rating, to 6.5 percent in the period 2013 to 2016. In the first three quarters of the year, the economy expanded by an average of 6.7 percent. The Duterte administration targets the economy to grow by 6.5 percent to 7.5 percent this year, and 7.0 – 8.0 percent annually from 2018-2022.



The national government debt as a percentage of GDP dropped from 49.2 percent as of end-2013 to 41.7 percent as of end-September 2017, while general government debt as a percentage of GDP fell from 39.2 percent as of end-2013 to 35.2 percent as of end-March 2017.



The country’s tax effort, computed as tax collection of the national government as a share of the economy’s gross domestic product and which measures efficiency in tax collection, improved from 13.3 percent in 2013 to 14.5 percent in the first three quarters of 2017.



The country’s GIR has remained above $80 billion on average since end-2013.



Unemployment rate fell from 7.1 percent in 2013 to 5.6 percent in July 2017, along with the rise in investments. Capital formation as a share to GDP grew from 22.1 percent in 2013 to 28.1 percent in the first three quarters of 2017.



Financial markets recognize these developments, as shown by favorable pricing for Philippine government securities and credit default swaps (CDS).



The Philippines’ 5-year CDS (credit default swap) spread as of December 7, 2017 stood at 63.83 basis points, better than Colombia’s (BBB/111.35), Indonesia’s (BBB-/95.115), and India’s (BBB-/68.475).



CDS is an instrument that serves as an insurance for debt securities. CDS spread, which is over comparable US instruments, is the premium charged by investors taking into account their risk perception of a sovereign.