Fitch notices cracks in Phl ratings outlook

While the economy remains in a growth momentum, a credit watchdog has warned the government of a “negative bias” on the country’s current investment grade. 

Fitch Ratings, which rates the country “BBB-”—the lowest investment grade it can give, but with a positive outlook, said in a report that it noted “negative sensitivities for the economy, such as the deterioration in governance standards, reversal in reforms and instability in the financial system.”

Instability in the financial system can possibly be triggered by a sustained period of excessive credit growth, which is considered credit negative, it said.

It added the presence of political uncertainty this year, with the national elections set on May 9 that will pick a successor to President Aquino.

Amid the negative sensitivities, Fitch said the domestic economy remained to be among the strongest in the region, even with the slowdown of growth in 2015 to 5.8 percent from year-ago’s 6.1 percent due to lower net exports.

It added that emerging markets in the region continue to enjoy financial buffers and policy adjustments to counter the negative impact of a deceleration in China’s growth, normalization of the United States’s interest rates, and stronger US dollar in the first quarter.

Fitch gave the Philippines its first investment grade in 2013 on the improvement of external payments position and governance standards, among other things.

The sustained strong output of the domestic economy and the improvement in the government’s revenue base are the two positive sensitivities for the country, Fitch said.

It noted that the economy’s average growth in the last five years stood at 5.9 percent, higher than the median 3.3 percent among similarly rated peers.

The country’s external creditor position stood at 14 percent of domestic output as of end-2015, “strong, compared with some of its peers in the ‘BBB’ rating category that were not net debtors.”

Fitch said the government’s budget gap, which, as of end-2015, stood at 0.9 percent of gross domestic product (GDP), remained within the government’s 2-percent target.

The government ended 2015 with a budget deficit of P121.7 billion, lower than the P283.7-billion target for the year, but 66 percent higher than the P73.1-billion deficit in end-2014.

Total revenues last year reached P2.109 trillion, lower than P2.275 trillion programmed for the year, but 11 percent higher year-on-year.

Expenditures were 13 percent lower than the P2.558-trillion program after it only amounted to P2.23 trillion.

”Actual spending was lower than what the government had budgeted, and continued improvement in revenue collection kept deficits at manageable levels,” Fitch noted.

Fitch’s rival, Moody’s Investor Service, meanwhile, said the Philippines still have buffers to counter the declining remittances from Filipinos working in some Asian economies.

Moody’s said the country has diversified areas where overseas Filipino workers (OFWs) work and they also have diversified skills.

Even as share of OFW remittances from oil-producing Gulf Cooperation Council (GCC) countries account for 31.7 percent of the total, next to the 34 percent in the US, growth of remittance inflows from the US is seen to counter this, if the world’s largest economy recovers further.

The occupational profile of workers is also a plus for the Philippines, it said, citing that OFWs are engaged in domestic work, hospitality, medical services, and engineering.

“Workers in such professions are much less likely to see an impact from the slowdown than those in the construction or oil and gas industries,” it added.

The report said the deceleration of remittance growth and inflows will likely affect two channels, namely the country’s balance-of-payment (BOP) position and foreign reserves.

It said countries like Sri Lanka, Bangladesh and Pakistan would be affected by these, but not so much for India and the Philippines, since both countries “are more resilient to the slowdown because of other buffers, both domestic and external.”

Bangko Sentral ng Pilipinas (BSP) data show that, as of end-March, the country’s gross international reserves (GIR) reached $82.6 billion, enough to cover 10.3 months’ worth of imports of goods and payments of services and income.

The country’s BOP position, which is the summary of the country’s total transactions with the rest of the world, as of end-February stood at a deficit of $1.13 billion, due to the impact of volatilities, both in the domestic and global financial markets.

The BSP has set a BOP surplus target of $2.2 billion this year.

The country ended 2015 with a BOP surplus of $2.6 billion, higher than the $2 billion target for the year.

While slower remittance inflows are seen to impact on domestic consumption, Moody’s said the local business process outsourcing (BPO) sector remains strong and is seen to counter the slack in remittance-fed consumption.

Also, it noted that since GCC currencies are pegged against the greenback, some countries like the Philippines would benefit from local currencies’ depreciation since “each dollar sent buys more local currency.”