Fitch’s Vote of Confidence
When credit rating agencies give a nation a thumbs up, it means it is doing good and on the right track, notwithstanding the challenges facing the global economy.
Fitch Ratings, one of the major international debt watchers, affirmed its investment-grade credit rating of “BBB” for the Philippines with a stable outlook, despite the global economic headwinds such as China’s growth slowdown, the elevated interest rates in the United States and the geopolitical tension in the Middle East and Europe.
This is a vote of confidence by Fitch on the economic fundamentals of the Philippines, whose economy grew 5.9 percent in the third quarter and 5.5 percent in the first nine months of 2023, among the highest in Southeast Asia. An overlooked number is the gross national income (GNI), which expanded 12.1 percent year-on-year in the third quarter, as net primary income (NPl) from the rest of the world surged 112.5 percent during the period.
GNI is a broader measure of the economy because it sums up the gross domestic product and income from overseas sources. This is highly applicable to the Philippines because of the impact of remittances from overseas Filipino workers and the business process outsourcing receipts on domestic output.
Our economy achieved this growth despite the surge in Bangko Sentral ng Pilipinas’ overnight borrowing rate—from 2 percent at the height of the pandemic to 6.5 percent today. The overnight lending rate is now at 7.0 percent. Hopefully, the softening of inflation to 4.9 percent in October from 6.1 percent in September will provide the BSP elbowroom to pause and eventually exit its monetary tightening cycle.
Companies need low-interest loans to support expansion, hire additional workers and meet rising consumer demand. If the interest rates are higher than the projected increase in profit and previous financing terms, businesses will be discouraged from taking out bank loans or repaying old debt.
Individual borrowers also wait for more favorable rates to start purchasing homes, cars and gadgets.
Fitch, in keeping the credit score of the Philippines, noted the economy’s strong medium-term growth prospects, declining liabilities, macroeconomic stability and sound economic rules. It expects economic growth in the country to average more than 6 percent in the medium term, which is slightly below the government’s target range of 6.5 percent to 8.0 percent for 2024 to 2028.
The government’s growth projections considered the risks posed by the El Niño drought and other natural disasters, global trade tensions and value chain disruptions.
Fitch is generous in heaping praises on the government’s performance so far. “The Marcos administration, in office since June 2022, has continued with structural economic reforms, passing a new law streamlining PPP [public-private partnerships] processes in September 2023, which could help catalyze private investment to address the Philippines’ large infrastructure gaps. This follows the foreign investment act and public service act passed in 2022, which opened up more areas of the economy to foreign and private investment,” Fitch says in its report.
It describes the BSP’s inflation-targeting framework and foreign exchange policies as “credible.” The peso has been stable in recent weeks averaging about 56.0 against the US dollar. Per BSP Governor Eli Remolona Jr., the central bank will continue to be data dependent in managing inflation expectations to avoid the second-round effects of supply shocks. This proactive policy of the BSP aims to avert any further price spikes and is seen as a better step than just responding to a development after it happened. The repercussion is that the BSP measures may take longer to untangle, like its monetary tightening cycle. The BSP does not want sudden policy changes so as not to confuse the financial markets.
Fitch also expects the gradual reduction in government debt to GDP ratio over the medium term, after it rose during the pandemic years when the government strengthened its social protection and unleashed economic stimulus programs to revive the economy. It sees the government debt-to-GDP level improving to 61 percent by 2025.
The national government deficit is seen narrowing to 4.9 percent of GDP by 2025, after hitting 7.3 percent of GDP in 2022. “The gradual pace of consolidation reflects the authorities’ focus on fostering economic growth and development,” according to Fitch’s report.
I think that overall, Fitch has a positive message for the Philippines, which outperforms many of its ratings peers in terms of economic growth despite its per capita income status. Many countries in the “BBB” ratings category belong to the upper-middle-income and high-income groups, while the Philippines has a lower-middle-income status with a gross national income per capita of $3,950 as of 2022.
Per the estimate of the National Economic and Development Authority, the Philippines should post a GNI per capita of about $4,500 to achieve its desired upper-middle-income status. The Department of Finance sees this happening by 2025, but this will largely depend on sustained economic growth and stable foreign exchange rate.
I believe that with the cooperation of everyone, we are on track to achieving this national target.
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