Fitch keeps invest grade; outlook stable

The economic situation remains on an even keel as credit watchdog Fitch Ratings affirmed the Philippines’ “BBB” investment grade with a stable outlook, citing the country’s robust medium-term growth potential and a manageable debt level.

An investment grade means the country can access more commercial debts at low rates since the chance of a default is low.

“The ‘BBB’ rating and stable outlook reflect the strong medium-term growth, which supports a gradual reduction in government debt/GDP (gross domestic product) over the medium term and the large size of the economy relative to ‘BBB’ peers,” Fitch Ratings said in a report released late Friday.

Fitch Ratings expects the economy to grow at 5.8 percent this year from 5.5 percent in 2023.

“We forecast real GDP growth of above 6 percent over the medium term, considerably stronger than the ‘BBB’ median of 3 percent, supported by large investments in infrastructure and reforms to foster trade and investment, including public-private partnerships,” Fitch said.

The 5.8 percent GDP forecast is slightly better than the first quarter’s 5.7 percent based on data from the Philippine Statistics Authority.

Fitch referred to the March update to the government’s medium-term fiscal program that raised the targeted fiscal deficit path, scaling back both revenue mobilization and expenditure consolidation plans.

The government is now targeting a budget deficit of 5.6 percent of GDP in 2024 and 5.2 percent of GDP in 2025, which Fitch said is broadly in line with its forecasts.

“As before, the expected fiscal consolidation rests on improved tax collection and spending efficiencies,” the report added.

“We believe there is some risk of further fiscal slippage, given the government’s continued focus on economic growth and the approach of mid-term elections in May 2025. The Finance Secretary has publicly indicated that no new taxes would be imposed in 2024, and possibly until the end of the Marcos Jr administration in 2028,” according to Fitch.

It said the overall budget balances have tended to be close to the targets in recent history.

Improving debt profile

“Strong nominal GDP growth and narrowing fiscal deficits contribute to our forecast of a downward path for government debt to GDP over the medium term. The government’s updated fiscal program envisages debt to GDP staying at around 60 percent of GDP until 2026, with substantial reductions only in 2027-2028,” it added.

The Bureau of the Treasury reported the debt-to-GDP ratio in the first quarter settled at 60.2 percent, down from 61.1 percent in the same period last year.

HSBC economist Aris Dacanay said production activities will continue to be backed by more consumers seeking non-essential goods.

“When times are tough, households in developing countries usually spend less on non-essentials. And, yet, amid a squeeze in purchasing power, Filipino consumers today are spending more on items such as skincare, sports and take-outs,” he said.

Jun Neri, chief economist at Bank of the Philippine Islands, said loan demand might grow further as he expects the Bangko Sentral ng Pilipinas (BSP) to lower its benchmark for interest rates.

“Moreover, the economy has been resilient despite the normalization of interest rates, with loan growth accelerating for the seventh straight month in April. We now expect a rate cut of around 50 basis points this year, assuming the Federal Reserve eases sometime in the second semester,” he said.

Fitch Ratings said overall inflation in general will likely remain within the BSP’s target band of 2 to 4 percent, encouraging stronger consumption.

It projects inflation at 3.8 percent this year and 3.4 percent in 2025.

Downside for inflation

HSBC’s Dacanay said households could take two percent more from their budget to spend on various goods and services due to lower rice prices.

The government recently lowered the rice tariff to 15 percent from 35 percent to decrease overall inflation by augmenting rice supply with imports.

“This is a game changer and a large downside risk to the inflation outlook,” Dacanay said.

Jonathan Ravelas, senior adviser at Reyes Tacandong and Co., said the government’s debt might grow further as it readies for long-term economic growth.

“With the government’s push for infrastructure spending and fiscal consolidation, we could still see some rise as higher rates for longer will push up debt costs,” he said.

Michael Ricafort, chief economist at Rizal Commercial Banking Corp., said interest rates might be relaxed in the near term as the financial risks from armed attacks in the Middle East dissipate.

“The peak in US and local long-term interest rates happened in the latter part of April or after April 20 when tensions eased between Iran and Israel. The borrowing costs are now cheaper than expected initially when the tensions were higher,” he said.

Fitch Ratings also projected a narrow current account deficit below 2 percent of GDP next year as the country’s payments for exports fall below $10 billion.