R&I upgrades PHL credit rating to ‘A-’

Japan-based Rating and Investment Information, Inc. (R&I) upgraded the Philippines’ investment grade rating to “A-” amid the country’s strong economic performance.

“Based on macroeconomic stability and high economic growth path as well as expected continuous improvement in fiscal balance, R&I has upgraded the Foreign Currency Issuer Rating to ‘A-,’” it said in a document posted on its website.

This was one notch up from the country’s previous rating of “BBB+” assigned in August a year ago.

The credit rater also assigned a “stable” outlook for the Philippines from “positive” previously. According to R&I, a positive or negative outlook is not a statement indicating a future change of a rating. If neither a positive nor negative outlook is appropriate, it assigns a stable outlook.

“The Philippine economy will likely see stable growth and continuous improvement in the level of national income against the backdrop of active public and private sector investments, development of domestic business sectors such as business process outsourcing, and favorable demographics, among other elements,” R&I said.

The Philippine economy expanded by 6.3% in the second quarter, the fastest in five quarters or since 6.4% in the first quarter of 2023.

“The Philippine economy has been showing fast growth among the major economies in Southeast Asia,” it added.

At 6.3%, the Philippines’ second-quarter gross domestic product (GDP) growth was the second fastest in Southeast Asia, only behind Vietnam (6.9%) and ahead of Malaysia (5.8%) and Indonesia (5%).

The government is targeting 6-7% growth this year and 6.5-7.5% for 2025.

R&I also noted the country’s improved fiscal management as debt remains “affordable, given the manageable burden of interest payment.”

“The fiscal balance as a share of GDP, which had deteriorated during the COVID-19 (coronavirus disease 2019) pandemic, has improved and the government debt ratio will likely start falling in a year or two,” it added.

As of the second quarter, the government’s deficit-to-GDP ratio stood at 5.3%, still below the 5.6% deficit ceiling set for this year.

Meanwhile, the debt-to-GDP ratio eased to 60.9% in the second quarter from 61% a year earlier. It is expected to ease further to 60.6% by end-2024.

R&I also said that the Philippines’ current account deficit is also “not necessarily a negative element” in its assessment.

“The foreign exchange reserves stand at a sufficient level in comparison with that of imports. Despite the liabilities in excess of financial assets of international investment position, the gap between liabilities and assets remains at a low level relative to GDP. R&I, thus, believes that the external risk is limited.”

The central bank projects a $4.7-billion current account deficit for 2024, equivalent to 1% of GDP. The current account deficit stood at $1.7 billion in the first quarter, equivalent to 1.6% of GDP.

Meanwhile, Finance Secretary Ralph G. Recto said in a statement that this was the Marcos administration’s first credit rating upgrade.

“Our refined Medium-Term Fiscal Program is our blueprint for our ‘road to A rating,’” he said.

“This ensures that we can reduce our deficit and debt gradually in a realistic manner, while creating more jobs, increasing our people’s incomes, growing the economy further, and decreasing poverty in the process. Sticking to this program can help us get there faster.”

The Department of Finance said that improved credit rating from R&I will help attract foreign investors and access more affordable borrowing terms.

“This allows the government to channel funds that would have otherwise been allotted for interest payments towards more development programs such as more infrastructure projects, improved social services, better healthcare system, and quality education.”

The Bangko Sentral ng Pilipinas (BSP) said that the credit upgrade means lower credit risk which “allows a country to access funding from development partners and international debt capital markets at lower cost.”

“The BSP is committed to delivering on its mandate of promoting price stability, financial stability, and a safe and efficient payments and settlements system as this broadly supports sustained and inclusive economic growth,’’ BSP Governor Eli M. Remolona, Jr. said.

Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said that the latest credit upgrade puts the Philippines three notches above the minimum investment grade rating.

“This is already similar and somewhat moved in line with the ‘A-’ credit rating given by another Japanese credit rating agency, JCR,” he added.

The Philippines currently holds a “A-” rating from the Japan Credit Rating Agency (JCR), “BBB” from Fitch Ratings, “Baa2” from Moody’s Ratings, and “BBB+” from S&P Global Ratings.

The government is targeting to achieve an “A” level rating before the end of the administration.

Source: Business World

Fitch affirms Philippines investment grade

 Fitch Ratings has affirmed the Philippines’ investment grade rating at BBB, a notch above the minimum grade, and maintained its stable outlook, citing the economy’s strong medium-term growth prospects.

In a rating action commentary dated June 7, the debt watcher said the Philippines’ gross domestic product (GDP) may expand by 5.8 percent this year from 5.5 percent in 2023 and 7.6 percent in 2022.

“We forecast real GDP growth of above six percent over the medium-term, considerably stronger than the BBB median of three percent, supported by large investments in infrastructure and reforms to foster trade and investment, including public-private partnerships (PPPs),” it said.

Fitch also sees a gradual reduction in government debt-to-GDP ratio at 54 percent by 2025 from 60.2 percent in the first quarter, which further supports the country’s long-term foreign currency issuer default rating of BBB.

However, the rating is “constrained by low GDP per head, despite an upward trend,” Fitch said.

“Droughts associated with the El Niño phenomenon are affecting agricultural production and electricity and water supply across parts of the country, while heavy rainfall expected during La Niña later this year poses risks to economic activity,” it said.

The Philippine economy expanded by 5.7 in the first quarter, slower than the 6.4 percent recorded in the same period a year ago, but higher than the 5.5 percent recorded in the fourth quarter of 2023.

The latest GDP print fell short of the government’s six to seven percent target.

Meanwhile, Fitch forecasts Philippine inflation to fall by 3.8 percent this year from six percent in 2023, before slowing further to 3.4 percent in 2025.

This is due to “lower commodity prices, base effects and the gradual pass-through of the 450-basis-point rate hikes since May 2022,” it said.

Headline inflation picked up to 3.9 percent in May from 3.8 percent in April. Year to date, inflation averaged 3.5 percent. This is still below the full-year 3.8-percent risk adjusted forecast of the Bangko Sentral ng Pilipinas (BSP).

In a statement, BSP Governor Eli Remolona, Jr. welcomed Fitch’s recognition of the central bank’s efforts to keep inflation within target and highlighted the BSP’s data-driven approach to setting monetary policy.

The debt watcher also expects the current account deficit to narrow to two percent of GDP at below $10 billion by 2025 from 2.6 percent last year, amid lower hydrocarbon import bill and higher services exports.

“Structural current account deficits are likely to persist in the medium-term, on strong domestic demand and the infrastructure build-out. We view the current account surpluses before 2019 as largely reflecting under-investment,” Fitch added.

“An investment-grade rating signals reduced credit risk, allowing countries to access funding at lower costs,” the BSP said.

A BBB rating indicates a low expectation of default risk, with the country’s capacity to meet financial commitments deemed adequate.

Meanwhile, a “stable” outlook suggests a low likelihood of a rating change over the next one to two years.

Source: Inquirer

Securing ‘A’ credit rating difficult as fiscal issues remain

Securing an “A” level sovereign credit rating by the end of the Marcos administration may be difficult as persistent underspending and the lack of reforms to improve revenue generation continue to constrain the Philippines’ growth prospects, analysts said.

“Getting an ‘A’ rating requires marked improvement in government finances and capacity to pay,” Enrico P. Villanueva, senior lecturer of economics at the University of the Philippines Los Baños, said via Messenger chat.

“An ‘A’ rating in five years is not impossible but requires hard work in terms of plugging holes in tax collection, purging corruption in revenue and spending activities, and improving prospects for growth,” he added.

The Philippines currently holds investment grade ratings with the three major debt watchers. Fitch Ratings rates the country at “BBB,” Moody’s Ratings at “Baa2,” and S&P Global Ratings at “BBB+.”

All three also assigned a “stable” outlook to their ratings for the country.

The government is aiming to achieve an “A” level rating by 2028 or the end of the Marcos administration. The Finance department earlier said that it organized, along with the central bank, an interagency committee for the “Road to A Credit Rating Agenda” back in 2019.

“An ‘A’ rating of course is a good sign for investors. But the question is: Will we get there?

In fact, we should have already attained that status if only this administration undertook the reforms that would have addressed fiscal consolidation without sacrificing growth,” Filomeno S. Sta. Ana III, coordinator of Action for Economic Reforms, said via Messenger chat.

He said the government should have raised its tax effort through reforms to help reduce its deficit.

“It could have also reduced the fiscal deficit by undertaking the reform of the military and uniformed personnel pension system, among other things.”

Latest data from the Bureau of the Treasury (BTr) showed that the National Government’s (NG) posted a budget surplus of P88 billion in January.

In 2023, the NG’s fiscal deficit narrowed by 6.32% to P1.51 trillion. However, it exceeded the P1.499-trillion ceiling set by the government.

As of end-2023, the deficit as a share of gross domestic product (GDP) settled at 6.2%. This was a tad higher than the 6.1% target set by the government but lower than the 7.3% ratio at end-2022.

Mr. Sta. Ana also noted the government’s issue of underspending.

“Underspending is an incorrect way of narrowing the deficit, for this results in slower growth. The correct approach is to increase revenues and at the same time remove the fat in the budget,” he said.

“The government is not serious about tax policy reform and is cutting spending that is necessary for human development but at the same time is increasing inefficient spending for partisan purposes. Do you think that this will lead to a credit grading upgrade? On the contrary, a credit downgrade can happen, unless the government reverses course,” Mr. Sta. Ana added.

The Philippine economy grew by 5.6% in 2023, falling short of the government’s 6-7% target and much slower than the 7.6% expansion in 2022 as state spending declined.

Government spending posted flat growth of 0.4% last year, slower than 4.9% in 2022.

In the fourth quarter alone, spending contracted by 1.8%, causing GDP growth for that period to slow to 5.6% from 6% in the third quarter and 7.1% expansion a year prior.

National Economic and Development Authority Secretary Arsenio M. Balisacan had said that the slower state spending seen last year was “intentional” due to the government’s fiscal consolidation plan.

For his part, IBON Foundation Sonny A. Africa said there is “little basis” for a credit rating upgrade if looking at recent macroeconomic indicators.

“The country’s external debt ratio, external debt service burden, current account deficit, NG deficit and NG revenues are all still much worse than before the overlong pandemic lockdowns,” he said in a Viber message.

Data from the central bank showed that the country’s outstanding external debt hit a record-high $125.4 billion at the end of December, up by 12.7% from $111.3 billion at end-2022. It was also equivalent to 28.7% of GDP.

The external debt service burden surged by 73.9% to $14.752 billion last year from the $8.483 billion recorded at end-2022.

Meanwhile, the NG’s outstanding debt hit a record P14.79 trillion as of end-January, data from the BTr showed. As of end-2023, outstanding debt as a share of GDP stood at 60.2%.

The BSP also reported a current account deficit of $11.2 billion in 2023, equivalent to 2.6% of GDP.

“Also, over that same period, economic growth (has slowed), the peso has depreciated, overseas remittances have slowed, and international reserves have depleted,” Mr. Africa added.

To improve the country’s credit rating, Mr. Villanueva said there must be efforts to improve Customs duties collection, mitigate smuggling, reduce corruption, and ensure efficient spending in line with the country’s development plan.

He also noted the importance of improving the ease of doing business and focusing on growth drivers like tourism and creative industries, among others.

Source: Business World