By Chino S. Leyco, May 31 2019; Manila Bulletin

Image Credit to Wall Street Journal

One of the three major international credit rating agencies kept its investment grade status given to the Philippines, citing sustainability of the economy’s robust growth, while recognizing efforts to bring inflation back to target.

Fitch Ratings announced yesterday that it is maintaining the Philippines’ credit rating at “BBB,” which is one notch above the minimum investment grade, with a “stable” outlook that indicates the absence of factors, which can change the rating within the short term.

The debt watcher said it expects the Philippine economy to grow by 6.1 percent this year, about the same as the 6.2 percent last year.

It said strong domestic demand, both from public and private sectors, will allow the economy to hurdle external headwinds, such as a slowing Chinese economy and trade tensions between China and the United States.

“Growth will remain supported by strong private consumption and the government’s public investment program, which targets an increase in capital expenditure to about 7 percent of GDP [gross domestic product] by 2022 from 4.5 percent in 2017,” Fitch said.

At the same time, the debt watcher said that after being temporarily elevated last year due mostly to supply factors, including rising global oil prices, average inflation this year is expected to decelerate, citing the 3.0 percent recorded in April, which was well within the official full-year target of 2.0 to 4.0 percent.

Fitch took note of decisive monetary and non-monetary measures that the government implemented to bring back inflation to within-target range.

“Overheating risks have subsided following the cumulative rate hikes of 175 basis points last year by the Bangko Sentral ng Pilipinas,” Fitch said. It added that, “Inflation fell… facilitated by the passage of the rice tariffication law that lifts import restrictions, and credit growth has slowed significantly.”

Responding to the rating-affirmation by Fitch, Finance Secretary Carlos Dominguez III said, “We are glad Fitch has taken note of the Philippine economy’s resilience to both external and domestic headwinds.”

“In part, the strength of the economy is credited to the decisive leadership of President Duterte who has demonstrated strong political will in implementing unpopular game-changing reforms to sustain the growth momentum and achieve financial inclusion for all,” Dominguez said.

“The first package of the comprehensive tax reform program and the liberalization of the rice sector, among a long list of reforms implemented recently, are vital structural changes that will keep the economy on its high growth path, create more jobs, and improve the living standards of Filipinos,” he added.

The finance chief also added that despite external and internal financial threats, economic growth is expected to gain more traction now as the government starts implementing a catch-up spending program on infrastructure and human capital development.

The “catch-up” program to the Duterte administration aims to reverse the lower-than-expected expansion in the year’s first quarter, brought about in large part by the congressional delay in the approval of the 2019 national budget.

For his part, Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno said the implementation of decisive actions by national government to address supply-side issues, including decisive policy rate hikes by the central bank, have been recognized by Fitch.

“The much improved inflation outlook, including better anchored inflation expectations, has allowed the BSP to cut policy rates by 25 bps and to cut the reserve requirement ratio in May,” Diokno said.

“Guided by its price stability mandate, the BSP will continue to adhere to the conduct of sound monetary policy, making sure it is properly calibrated to provide an environment that enables sustainable economic growth,” he added.

Meantime, Fitch likewise cited other factors for its decision to affirm the Philippines’ “BBB” rating with a “stable” outlook, including stable banking sector, adequate foreign exchange reserves supported by sustained inflows in the form of remittances and business process outsourcing (BPO) revenues, and manageable debt situation.