By means of Luisa Maria Jacinta C. Jocson, Reporter
S&P GLOBAL RATINGS Affon Tuesday affirmed the Philippines’ investment grade rating and raised its outlook from “stable” to “positive” to reflect the economy’s strong growth potential amid improved institutional strength thanks to “effective policymaking.”
The debt watcher confirmed on Tuesday its long-term credit rating ‘BBB+’ for the country, which is well below the ‘A’ level that the government is aiming for. It also maintained its “A-2” short-term rating for the Philippines.
Still, S&P Global raised its rating outlook from ‘stable’ to ‘positive’. A positive outlook means the Philippines’ credit rating could be upgraded over the next two years if improvements continue.
“Our improved institutional rating drives our positive view of the Philippines. We believe the strengthening of the country’s institutional settings, which have contributed to significant improvement in the sovereign’s credit metrics over the past decade, will continue,” S&P Global said in a statement. “This is evidenced by the strong economic recovery over the past two years and ongoing reforms to support the business and investment climate.”
“This improvement could lead to stronger government support in the next 12 to 24 months if the Philippine economy maintains its external strength and healthy growth rates and fiscal performance improves.”
Bangko Sentral ng Pilipinas (BSP) Governor Eli M. Remolona Jr. said the debt watcher’s upgraded outlook “reflects the work the government has done to improve the economic, fiscal and monetary environment, enabling strong growth can be continued.”
Treasury Secretary Ralph G. Recto also said this “reafFThis is a good indication of our stable economic and political environment and that we are on track to achieve growth-enhancing fiscal consolidation.”
“We have a comprehensive ‘Road to A’ initiative to ensure we secure more upgrades soon,” he added.
S&P Global said the Philippines’ sovereign rating reflects the economy’s “above-average growth potential.”
“This power underlies constructive development outcomes. The ratings also benefit from the country’s strong external position,” the report said.
Through the first nine months of the year, the Philippine economy grew 5.8%, slightly below the government’s target of gross domestic product (GDP) growth of 6-7% this year.
The government is targeting GDP growth of 6.5 to 7.5 percent next year and 6.5 to 8 percent growth between 2026 and 2028.
S&P Global expects Philippine GDP growth to average 5.5% this year, driven by exports and easing inflationary pressures.
“Continued business, investment and tax reforms should support growth over the next three to four years.”
The Philippine economy is likely to grow at an average annual rate of 6.2% over the next three years, the report said.
“Solid household and corporate balance sheets, and significant remittance inflows support the positive trajectory of the Philippine economy over the medium term,” S&P Global said.
“Continued efforts to address infrastructure gaps, and improvements in the business environment through regulatory and tax reforms should also support economic productivity growth.”
BUDGET REFORMS
The government’s budget reforms have also boosted the economic outlook, the credit rating agency said.
“We believe that effective policymaking in the Philippines has led to structural improvements in the country’s credit metrics. Budget reforms have increased government revenues as a share of GDP and helped finance public investments. Improved infrastructure and policy environment have helped keep economic growth strong over the past decade,” the report said.
“The government’s fiscal and debt situation had deteriorated as a result of the economic fallout from the pandemic and associated extraordinary policy responses. Fiscal buffers were built up thanks to a long period of caution before the pandemic subsided, but consolidation has begun as the economic recovery is well on track. The Philippines’ low GDP per capita compared to other investment grade government bonds tempers these strengths,” the report said.
The latest data from the Ministry of Finance show that the budget deficit fell by 1.35% to 970.2 billion euros in the first nine months.
The government aims to bring the deficit ratio to 5.6% this year and further reduce it to 3.7% by 2028.
“The Philippine government has generally pursued effective and prudent fiscal policies over the past decade. Improvements in the quality of spending, manageable budget deficits and relatively low government debt are evidence of this,” S&P Global said.
However, the credit rating agency said restoring the fiscal and debt situation to pre-pandemic levels will be challenging and likely to be a gradual process.
“The continued economic recovery in the Philippines should facilitate a reduction in the government deficit and further stabilization of the debt burden,” the report said. “However, it will take several years for fiscal balances to recover to pre-pandemic levels given the eroded fiscal space.”
S&P Global added that it expects the country’s net public debt to gradually decline due to continued fiscal consolidation.
Going forward, the debt watcher said it could improve the Philippines’ credit rating if the current account deficit and fiscal position remain well managed.
“We may upgrade the ratings if our expectations of narrowing current account deficits over the forecast horizon are realized to the extent that buffers in the Philippines’ narrow net external asset position are preserved and if the government achieves faster fiscal consolidation,” the report said .
S&P Global expects the country’s current account deficit to persist, but at “modest levels.”
The BSP estimates this year’s current account deficit at $6.8 billion, equivalent to 1.5% of GDP. In the first half of the year, the country’s current account deficit stood at $7.1 billion, accounting for 3.2% of economic output.
On the other hand, the rating outlook could be downgraded to ‘stable’ if the economic recovery slows or if the government’s fiscal and debt position deteriorates.
“If persistently large current account deficits lead to a structural weakening of the Philippines’ external balance, we would also revise the outlook to stable,” S&P Global added.