Philippines retains investment grade rating from Fitch

MANILA, Philippines — Fitch Ratings has affirmed the one notch above minimum investment grade credit rating and stable outlook of the Philippines on the back of the country’s strong macroeconomic fundamentals, but flagged anew overheating risks.

The rating agency retained the ‘BBB” rating or a notch above minimum investment grade as the estimated five-year average gross domestic product (GDP) growth of 6.5 percent for the Philippines at end this year was far above the 3.1 percent average growth among same rated countries.

The Philippines has booked 77 quarters of uninterrupted growth with the GDP expansion accelerating to 6.8 percent in the first quarter from the revised 6.5 percent in the fourth quarter of last year.

Fitch expects the Philippines to maintain its place among the fastest growing economies in Asia Pacific as robust domestic demand may translate to a strong GDP growth of 6.8 percent in 2019 and 2020.

“Strong macroeconomic performance remains a rating strength, notwithstanding overheating risks,” it said.

Bangko Sentral ng Pilipinas Governor Nestor Espenilla Jr. said concerns about overheating run counter to the central bank’s assessment. 

Espenilla said the central bank is confident the Philippine economy would maintain a robust growth without causing runaway inflation.

The BSP chief said the government’s massive infrastructure build up would boost the economy’s productive capacity as growth would remain consistent with the potential output of 6.5 to seven percent.

Likewise, Espenilla said banks continue to observe prudent lending standards, keeping their exposure to bad debts minimal and lending to real estate sector within regulatory threshold levels.

He said the central bank’s firm commitment to price stability conducive to a balanced and sustainable growth of the economy has allowed the Philippines to remain resilient amid external headwinds and to remain as one of the fastest growing economies in the region.

The debt watcher said the country’s sovereign ratings balance a favorable growth outlook, government debt levels that are below peer medians, a net external creditor position and policies geared toward maintaining macro stability against lower income per capita and weaker governance and business environment indicators compared to its rating category peers.

“However, the agency believes the economy faces some overheating risks, evident from a recent rise in inflation, rapid credit growth and a widening trade deficit, although steps taken by the BSP to tighten monetary policy may contain these risks,” Fitch said.

The central bank delivered back-to-back rate hikes in May and June to curb rising inflationary pressures arising from higher global oil prices as well as the impact of the implementation of Republic Act 10963 or the Tax Reform for Acceleration and Inclusion (TRAIN) Law.

Fitch expects inflation to average 4.4 percent this year due in large part to higher commodity prices and a recent increase in excise taxes associated with the tax reform package before easing to 3.8 percent next year as the one-off impact of the tax hikes is likely to dissipate.

On the other hand, it added lending continued to grow briskly at 16.3 percent in May, but aggregate measures do not indicate severe risks of over-leverage.

“Strong economic activity has contributed to a prolonged period of rapid credit expansion. System loans have risen at almost twice the rate of nominal GDP, on average, over the last five years,” it said.