Fitch positive outlook drowns out Digong noise

The positive growth outlook credit watchdog Fitch Ratings gave the country increases the need for the approval of the Comprehensive Tax Reform Program (CTRP) pending with Congress since it will ensure that necessary funds will be available to finance governmen projects targeted to end poverty and elevate the country to a high-income economy, Finance Secretary Carlos Dominguez III said. 

He added the credit rating firm’s latest action underscores the fact that despite the recent political noise in the country,

these do not hinder the country’s economic expansion. Fitch in its report cited increased violence as the Duterte administration addresses the illegal drugs issue but pointed out that “macroeconomic performance has remained strong” and that “domestic political stability has been maintained.”

“Fitch Rating’s latest affirmation of its positive outlook on the Philippines only means that the political chatter emanating from certain quarters has failed to dent the country’s sustained-growth narrative resulting from its strong economic performance, continued political stability and aggressive infrastructure and human capital investments under the Duterte presidency,” he said.

Fitch last week affirmed its investment grade rating of ‘BBB-’ with Positive outlook on the Philippines due to “continued strong and consistent growth performance, a robust net external creditor position and government debt levels that are lower than median peers in the ‘BBB’ rating category.”

It explained that the domestic output’s performance is “a rating strength” after noting the 6.8 percent expansion in 2016, higher than the previous year’s 5.9 percent.

The output, it said, is “supported by continued strong growth in private consumption spending and investment.”

Dominguez said Fitch’s optimistic view, along with those of other international institutions, gives the government “more reason to highlight on the country’s growth story by moving ahead on such policy reforms as its Comprehensive Tax Reform Program to ensure the financial sustainability of its ambitious program to eradicate poverty and transform the Philippines into a high-income economy in one generation.”

“To maintain broad policy continuity, the Duterte administration will continue to pursue its 10-point socioeconomic agenda on high—and inclusive—growth, with a focus on closing the infrastructure gap, improving the ease of doing business to attract more investments, and attacking poverty by spending big on human capital formation,” he added.

In a statement, Fitch said the decision to affirm its ‘BBB-‘ rating with Positive outlook on the country was made on back of the economy’s “continued strong and consistent growth performance, a robust net external creditor position and government debt levels that are lower than median peers in the ‘BBB’ rating category.”

The domestic output’s performance was “a rating strength” after noting the 6.8 percent expansion in 2016, which was higher than the previous year’s 5.9 percent, Fitch said.

This output, it said, was “supported by continued strong growth in private consumption spending and investment.”

Importance of inflows from overseas Filipinos, which has been a major growth driver and accounts for about 10 percent of gross domestic product (GDP), continued to boost domestic spending, it said.

Remittances grew by five percent in 2016, higher than the Bangko Sentral ng Pilipinas’ (BSP) four percent growth target.

Investment, in turn, remains strong on back of higher infrastructure spending, which gets backing from both the government and the private sector.

Sustained growth of the business process outsourcing (BPO) was another growth driver, it said, as it provided employment and boost domestic demand.

With these factors, Gross Domestic Product (GDP) in the last five years ending 2016 averaged at 6.6 percent, higher than the 3.2 percent medium for ‘BBB’-rated economies, Fitch added.

For 2017, the debt rater expects the local economy to grow by 6.8 percent and by 6.7 percent in 2018. The growth forecast for the country this year is within the government’s 6.5 to 7.5 percent target while the 2018 GDP target is seven to eight percent.

It said monetary and exchange rate policies in the country “are effective” and the central bank “has been able to maintain inflation at modest levels.”

”The foreign exchange managed-float regime allows the peso to act as a cushion against external shocks, as evidenced by the downward adjustment in the currency following portfolio outflows in 2016,” it said.

Fitch said the upcoming change in the BSP regime, with BSP Governor Amando Tetangco Jr. stepping down from his two six-year terms on July 2, “will be important in the context of policy stability and credibility.”

It, however, said it will continue to monitor developments since its rating on the country is “constrained by relatively weak governance standards, a narrow government revenue base, and levels of per capita income and human development that are below the ‘BBB’ median”.

Tetangco, meanhile, said the positive action of Fitch attests to the strength and resiliency of the domestic economy.

Fitch noted the strong external payments position of the country, boosted by the current account surpluses that were achieved since 2003.

In recent years, the country’s current account surplus, although still driven by remittances from overseas Filipinos, tourism receipts and the business process outsourcing (BPO) sectors, has declined in line with the rise in imports, which in turn is needed by the expanding economy.

As of end-2016, the country’s current account surplus amounted to $6601 million, or about 0.2 percent of gross domestic product (GDP).

The country’s gross international reserves (GIR), meanwhile reached a record-high of $81.4 billion as of last February. The current level of foreign reserves of the Philippines is enough to cover nine months’ worth of imports.

Tetangco said all the positive developments in the country “did not happen by chance.” ”The country’s economic gains have been built from deeply rooted structural and sound policy reforms implemented over the years,” he said.

”Economic gains are the results of years of disciplined macroeconomic policy making,” he added.

Investors Relations Office (IRO) Executive Director Editha Martin, in a statement, said the country “has made significant strides since it clinched the investment grade rating from Fitch in March 2013.”

”Its macroeconomic performance and public finances have significantly improved, and vital governance reforms have been entrenched,” she said.

Martin said the country “ outperformed other emerging economies in 2016 with our robust GDP growth, among other metrics.”

“We remain confident that the continued strong performance of the economy, relentless pursuit of its governance agenda and implementation of vital structural reforms will finally translate to a long overdue upgrade from Fitch,” she added.

Economic managers have repeatedly said the country’s credit ratings, although elevated to investment grade by the three major debt watchers namely Fitch Ratings, Moody’s and Standard & Poor’s (S&P) since 2013, remain under-rated since markets have higher ratings for the economy for years now.

The country has so far received about 24 positive ratings actions in the last six years on sustained growth of the domestic economy due in part to improvement of fundamentals. LUIS LEONCIO