The Philippines received another affirmation of its two-notch above investment grade from Moody’s Investors Service (Moody’s), two days after getting a similar move from credit watchdog Fitch Ratings.

The country currently has a debt rating of Baa2 with a stable outlook from Moody’s.

Moody’s, however, shared Fitch’s views about the impact of an overheated economy.

It said unabated overheating pressures may lead to a “deterioration in fiscal and government debt metrics and an erosion of the country’s external payments position.”

It added the reversal of reforms that have supported recent gains in economic and fiscal strength and the implementation of prospective changes in governance structures in a way that diminishes fiscal strength “would also likely lead to a downgrade.”

Moody’s said the stable outlook “balances positive and negative factors.”

Growth will remain robust and “the Philippines’ fiscal metrics will strengthen somewhat as the government continues to make progress on its socioeconomic reform agenda but these trends are likely to fall short of bringing the Philippines’ credit profile in line with higher-rated countries,” Moody’s added.

At the same time, policymakers face challenges in managing the current inflationary pressures, it said.

Moody’s noted domestic political developments and prospective changes to governance frameworks, including a shift to a federal form of government, “present downside risks to the country’s institutional and fiscal profile.”

Moody’s said the country’s strengths include a relatively large economy and high growth potential that support the economy’s capacity to absorb shocks.

“They also comprise a long track record of sustaining macroeconomic and financial stability with policies that continue to deliver stable and relatively low debt levels,” it said.

“The country’s favorable demographics support steadily rising labor inputs and potential growth while reducing the burden of ageing-related costs on government finances,” Moody’s said.

“Large foreign exchange reserves and low economy-wide external debt contribute to macroeconomic stability,” it said.

“More generally, relatively low reliance on either foreign sources of income or financing insulates the Philippines from the direct impact of abrupt changes in the global macroeconomic and financial environment,” it added.

The low per capita income relative to its peers, at roughly $8,300 in 2017 compared with around $23,400 for the median Baa-rated sovereign, is an important constraint on both economic strength and the rating.

A related and equally important constraint is the government’s limited capacity to generate revenue which principally reflects the population’s low incomes and the large informal economy, it added.

Despite recent and prospective improvements, government revenue as a share of gross domestic product remains well below the Baa-median as of 2017.

“Despite moderate debt levels, interest payments absorb a relatively large share of the comparatively narrow revenue base. Finally, and contrasting with increasingly effective policymaking, relatively weak rule of law and control of corruption weigh on the Philippines’ institutional capacity as compared to peers,” Moody’s said.

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