Fitch keeps PH’s investment grade credit rating

Debt watcher Fitch Ratings yesterday said it had maintained the Philippines’ investment grade credit rating of ‘BBB’ with a “stable” outlook even as the economy was facing risk of overheating.

In a statement, Fitch said its ratings on the Philippine economy “balance favorable growth prospects, lower government debt and a net external creditor position against lower per capita income levels, weaker business environment and lower standards of governance compared with its rating category peers.”

Fitch projected a 6.6-percent gross domestic product (GDP) growth in the next two years, although below the government’s medium-term target range of 7-8 percent.

“GDP growth could come under downward pressure, similar to other countries in the region, from the slowdown in China and escalating trade tensions with the US, and from rising domestic and global interest rates,” Fitch said.

It said the economy would continue to be buoyed by robust domestic demand, coupled by higher public infrastructure spending, referring to the Duterte administration’s “Build, Build, Build” program.

Under the program, the government plans to roll out 75 “game-changing” projects, with about half targeted to be finished within President Duterte’s term. Spending on infrastructure was estimated at P8 trillion up to 2022.

However, Fitch was cautious about a potentially overheating economy.

“Overheating risks remain in place, highlighted by rapid credit growth and a widening current account deficit, although the central bank’s stated intention to remain vigilant against developments that could affect the inflation outlook,” it said.

Last week, the Bangko Sentral ng Pilipinas (BSP) said the current account was seen to end this year at a $6.4-billion deficit, or more than twice the previous deficit projection of $3.1 billion.

The current account deficit was also seen further ballooning to $8.4 billion next year, putting further pressure on the peso.

“The current account deficit is likely to have widened to some 2 percent of GDP in 2018 driven by strong capital goods imports and a sharp slowdown in exports. We expect the deficit to remain at about the same level in 2019 and 2020 … However, remittances and services exports related to the business process outsourcing and tourism sectors are forecast to remain strong and will keep the deficit from widening sharply. We forecast the current account deficit at -1.9 percent in 2019 and 2020,” Fitch said.

“A widening current account deficit amid tighter global monetary conditions and a stronger dollar drove the peso down by some 6 percent against the US dollar in the year-to-date. Reserves have declined by $5.7 billion since the start of the year, but Fitch expects coverage of current external payments to remain high at 6.8 months at end-2018,” it said.

As for inflation, Fitch said pressures appeared to be easing, partly due to recent monetary policy tightening and easing of some supply-side pressures.

Amid high inflation, the BSP had hiked the key policy rate by a total of 175 basis points this year to 4.75 percent.

Fitch expects full-year inflation to average 5.2 percent in 2018 and to decline to within the central bank’s target range of 2 to 4 percent in 2019 and 2020 as the cumulative rate increases of 175 bps in 2018 take effect and as the impact of excise tax hikes in 2018 dissipates,” it said.

Finance Secretary Carlos G. Dominguez III said Fitch’s forecast of strong growth in the years ahead affirmed the soundness of the Duterte administration’s economic development strategy.

On Fitch’s concerns on potential overheating, BSP Deputy Governor Diwa C. Guinigundo was quoted as saying “the economy is not facing any material threat of overheating.”

“While credit is growing, the pace of increase is within levels considered manageable based not only on the BSP’s own metrics but even on international benchmarks.”