The Bangko Sentral ng Pilipinas is consistent in its signals to the market about its unwavering commitment to addressing the challenges brought by monetary policy tightening of advanced economies and its impact on small open economies like the Philippines.

BSP Governor Felipe M. Medalla stated in light of rating firm Fitch Rating's recent assessment maintaining the Philippines at two notches above investment grade while also keeping its negative outlook.

A negative outlook means Fitch could potentially downgrade the country's credit rating in the next 12 to 24 months.

BSP has at its policy disposal, interest rate adjustments, a flexible exchange rate, and the use of foreign exchange reserves, according to Medalla.

The BSP said it supports the implementation by the national government of targeted non-monetary interventions to help address price pressures.

"The combination of these measures will help us manage exchange rate pressures and bring inflation back to a target-consistent path," the central bank chief indicated.

High prices, rates as threats

Fitch attributed the negative outlook on risks to the medium-term growth prospects, fiscal adjustment path, and external buffers in an environment of higher interest rates, weaker external demand, and higher commodity prices.

Fitch Ratings has affirmed the credit rating "BBB" given the country's credible economic policy framework, strong economic growth, and sound external finances.

In its statement, Fitch "forecasts the Philippines' real gross domestic product growth at 6.8 percent in 2022, driven by strong domestic demand, reflecting normalization of economic activity after the pandemic and the government's investment program." Fitch also expects "the general government deficit to narrow to 4.3 percent of GDP in 2022 and 2.4 percent of GDP by 2024, from 4.8 percent of GDP in 2021."

The direction of these estimates is aligned with the Marcos administration's medium-term fiscal framework, which according to the head of the economic team and Finance Secretary Benjamin Diokno, was formulated to guide the government's financing program for the next six years.

Diokno also emphasized that the economic team is employing the necessary policy levers to address emerging risks.

Fitch also noted that the BSP's inflation-targeting framework "remains credible" amid monetary tightening and domestic inflationary pressures.

The net external creditor position is likely to remain stronger than the "BBB" median, according to Fitch.

While the rating agency expects the current account deficit to widen to 5.0 percent of the GDP in 2022, "the wider CAD is largely driven by higher commodity imports supported by strong domestic demand," and Fitch forecasts a narrowing of the CAD to 1.8 percent of GDP by 2024.

Fitch added that "the emergence of CAD has put pressure on foreign exchange reserves, although we expect reserve coverage to remain ample at about six months of current external payments."

Based on the latest BSP data, the CAD is financeable considering that liquidity buffers remain robust as of end-September 2022.