Ratings upgrade risks underplaying Philippines worsening external position

MANILA, Philippines —  The decision of ratings agency Standard and Poor’s (S&P) to upgrade its long-term credit rating for the Philippines to BBB+ “risks underplaying the country’s worsening external position as well as it deteriorating political situation,” according to London-based Capital Economics. 

In a report, Capital Economics said the latest upgrade from a BBB rating comes in response to the country’s “impressive” recent growth record as well as an improvement in its fiscal position. 

It noted that the country’s gross domestic product (GDP) growth has averaged just under six percent over the past decade, which is significantly higher than in other countries with the same rating. 

There has also been a big improvement in the fiscal position. Government debt is currently just over 40 percent of GDP, while the budget deficit in 2018 was 3.2 percent of GDP. 

“However, we are concerned that S&P is overlooking risks elsewhere in the economy. The first is the widening current account deficit, resulting from rising imports of capital goods and raw materials to supply the country’s infrastructure drive,” Capital Economics said. 

“Given the country’s poor export prospects, we expect the deficit to widen further over the next couple of years, reaching around 3.5 percent of GDP in 2020,” it said. 

A widening current account deficit weakens the peso, making imports more expensive, hurting local manufacturers as they bring in raw materials and capital goods. 

Capital Economics also sees risk in the detriorating political situation as it dampens investment prospects. 

“The second risk is the worsening political situation under President Duterte, who is unnerving investors with his attacks on opposition politicians and his undermining of the constitution,” it said. 

“Pledges of new foreign direct investment have weakened considerably since Duterte was elected, while improvements to the business environment have stalled. Both bode poorly for the country’s long-term prospects,” it said.