S&P warns of downgrade risk if ‘orthodox’ reforms stall
Debt watcher Standard & Poor’s (S&P) has maintained the Philippines’ BBB investment grade credit rating with “stable” outlook, saying the country’s strong external position will lead to higher per capita income, but warned that ratings may go down if the reform agenda stalls under the next administration.
The sovereign rating of BBB is one notch higher than the minimum investment-grade rating.
“The ratings on the Philippines reflect our assessment of its strong external position, which features rising foreign exchange reserves, and low and declining external debt,” S&P said in its latest report on the Philippines released late Thursday.
The rating is assigned a “stable” outlook, indicating it will likely stay the same over the short term (12-18 months) in the absence of significant risks to the country’s creditworthiness.
S&P’s ratings action was the second by a major credit monitor this month. Earlier, Fitch Ratings kept its BBB—rating—the lowest investment grade rating—for the Philippines, but raised its outlook from “stable” to “positive,” drawing criticism from the government that the country was being “underrated” by Fitch, compared with the one notch higher ratings issued by S&P and Moody’s.
S&P clarified that its rating and outlook could change depending on the result of the May 9 elections.
“Our affirmation of the ratings is premised on the new administration after the May 2016
elections having a strong mandate to continue to pursue orthodox fiscal, economic, and development policies,” S&P said.
“The stable outlook reflects our expectation that the key economic, fiscal, external, and monetary credit measures for the Philippines will continue to improve,” it added.
Despite the uncertainty of the elections, the credit ratings firm stressed that many of the sound policies implemented over the past six years are well entrenched and therefore are unlikely to be reversed when the new administration steps in at the end of June.
The gains from sound policies include declining debt burden, a strong external payments
position, modest inflation, robust consumption, growing investments, and a stable banking system, S&P said.
The debt watchdog expects the country’s external payments position to remain strong, adding that the country will continue to be a net external creditor to the rest of the world.
This position is aided by robust foreign-exchange inflows led by remittances, revenues of business process outsourcing (BPO) sector, and tourism receipts.
S&P also cited manageability of the Philippines’ debt as another key strength, noting the country’s “low” foreign borrowings that mostly have long-term maturities.
Give the country’s sound fundamentals, S&P said it expects incomes to rise in the Philippines over the next few years.
Based on the debt watcher’s projections, growth in real per-capita income will accelerate from 4.1 percent in 2015 to 4.4 percent this year, and further to an average of 4.6 percent in the next three years. Per-capita gross domestic product (GDP), in nominal terms, is estimated to reach $3,000 this year.
S&P said it may raise the ratings if continued fiscal improvements under the new administration boost investment and economic growth prospects, or if changes in governance and the policy environment “lead us to a better assessment of institutional and governance effectiveness.”
On the other hand, a ratings downgrade is possible if, under the new administration, the reform agenda stalls or if there is a reversal of the recent gains in the Philippines’ fiscal or external positions, S&P said.
Meanwhile, the Aquino Administration welcomed S&P’s move.
“Rating us a notch above the minimum investment grade is an encouraging affirmation of President [Benigno] Aquino [3rd]’s record of sound economic management. We still face strong external headwinds in the near term; we’ll keep our fundamentals strong and our debt resilient,” Finance Secretary Cesar Purisima said.
The Investor Relations Office (IRO) said the affirmation by S&P of the Philippines’ favorable credit rating, together with the ‘stable’ outlook, substantiates projections of the sustainability of the country’s economic gains.
“The Philippines has implemented a wide array of structural reforms that are crucial for avoiding boom-and-bust cycles and that have placed the economy on a higher growth trajectory,” the IRO said.
“Among these are sound frameworks for monetary policy and bank supervision, which have respectively provided an inflation environment conducive to rising investments and consumption, and a banking sector that continues to fuel economic growth,” the IRO added.
S&P also recognized the work done by the BSP to promote price and fiscal stability.
The debt monitor said the expected implementation of new measures for monetary policy, such as the interest rate corridor system, would make the BSP even more effective in the delivery of its mandate.
“The strengthened oversight of the financial sector by the Bangko Sentral ng Pilipinas combined with modest growth in private sector debt and real estate prices have also contributed to improved system stability in recent years,” S&P noted.