Philippines underrated by credit watchdogs—Purisima

By Luis Leoncio

Credit watchdog Fitch Rating, affirming the investment rating on the country last Friday, failed to impress Finance Secretary Cesar Purisima, who claimed the country remains underrated.

Fitch cited the country’s strong external finances and improvement in its fiscal situation, among other things, for maintaining the credit grade on the country.

In a statement, the debt rater said it is also affirming the country’s ‘BBB’ local currency issuer default rating, the ‘BBB’ senior unsecured foreign-currency bond rating, ‘BBB-’ local-currency bond rating, ‘BBB’ Country Ceiling rating, and the ‘F3’ Short-Term Foreign-Currency IDR rating.

“We believe that we are still underrated by at least a notch,” Purisima said in a statement. He said the Philippines outshines similarly rated peer sovereigns amid the global volatility.

“Likewise, we continue to outperform with better fundamentals and robust domestic drivers of growth,” Purisima added.

He noted the credit default swap (CDS) spread on the country’s 5-year bonds stood at 116.35 basis points (bps) last April 7, better than the 264.87 bps for Colombia, 145 bps for Thailand, and 182.34 bps for Mexico.

CDS measures the risk of a country going into a default on its foreign debts.Fitch assigns a higher credit rating of BBB to Colombia, and an even higher rating of BBB+ to Thailand and Mexico.

Purisima said the Philippines’s debt burden is also more manageable compared to countries with higher credit ratings.

In 2015, the Philippines’s general government debt as a percentage of gross domestic product (GDP) was 36.8 percent better than Colombia’s 44.4 percent, Panama’s 40.6 percent, Mexico’s 44.6 percent, Spain’s 99.1 percent, and Italy’s 133.3 percent.

“Panama is rated a notch higher by Fitch at BBB. Mexico, Spain, and Italy are rated two notches higher at BBB+,” Purisima noted.He added the Philippines has had a solid six-year run of growth and stability as the world’s most upgraded sovereign.

“But as they say, the biggest room in the world is the room for improvement. With another upgrade in the offing, the onus for continuity looms larger than ever,” Purisima added.

Fitch noted the sustained surplus of the country’s current account, which has been achieved since 2003, due in part to the resiliency of inflows from Overseas Filipino Workers (OFWs), which in turn, backed the country’s foreign reserves, for keeping the investment grade on the country.

“The country’s net external creditor position at nearly 14 percent of GDP compares to the median net debtor position of 4.6 percent of GDP among peers in the ‘BBB’ rating category,” it said.

The debt rater also cited the drop in the country’s debt and deficit levels, with the proportion of general government debt to gross domestic product (GDP) estimated at 36 percent of domestic output as of end-2015 from 43 percent in 2010.

Government fiscal gap as of end-2015 accounted for 0.9 percent of GDP from 3.5 percent in 2010, it said.

“Fitch estimates that the fiscal deficit would remain under two percent of GDP over 2016-2017,” it said Fitch, on the other hand, said it “continues to view low government revenues, which reduces the sovereign’s ability to contain fiscal balances in the event of a shock, as a weakness in the Philippines’s fiscal profile.”

It projects the general government revenue to account to 20 percent of domestic output in 2015, which it noted is “lower than the ‘BBB’ median’s 28.6 percent and ‘A’ median’s 34.7 percent.

The country’s low average income and level of development is a credit weakness, it said.

Domestic growth, meanwhile, “remains favorable”, it said citing the 5.9 average from 2011-15 which is far above the ‘BBB’ median of 3.3 percent and the ‘A’ median of 3.2 percent.”

“Fitch expects the Philippines’s growth momentum to continue and expects real GDP growth to average around 6 percent over 2016-17,” it said.