The Philippines Races Ahead of India and Indonesia on the Investment Grade Curve

Fitch Ratings has raised the Philippines' credit rating to BBB (good credit quality) from BBB-, with a stable outlook. Fitch said the upgrade reflects the country's strong and consistent macroeconomic performance, which is underpinned by sound policies that are supportive of high and sustainable growth rates.

The Philippines now has the same credit rating as Thailand, and is rated higher than India and Indonesia, both of which were earlier rated BBB- by Fitch. All four economies still have a way to go to be on par with Singapore (AAA), China (A+) and Malaysia (A-).

Solid GDP growth

Fitch forecasts real GDP growth for the Philippines to reach 6.8% in both 2018 and 2019, keeping the country among the ranks of the fastest-growing economies in Asia Pacific. 

"Investor sentiment has also remained strong, which is evident from solid domestic demand and inflows of foreign direct investment," said Fitch in a statement. "There is no evidence so far that incidents of violence associated with the administration's campaign against the illegal drug trade have undermined investor confidence."

Fitch says it expects higher infrastructure spending under the government's public investment program to support continued robust growth.

The credit-rating agency also cited as positive drivers the sustained decline in gross general government debt, inflation keeping within the target range of 2%-4%, continued exchange rate flexibility and the appointment of a new central bank governor who came from the ranks, providing continuity and credibility in monetary policy.    

Long-standing weaknesses

But low government revenues continue to be a weakness, with general government revenues estimated by Fitch to equal around 18.5% of GDP at end-2017, compared with the median of 28.8% for all BBB-rated economies.

The first component of a five-part comprehensive tax reform program has passed both houses of Congress and might be signed before the year ends. "We estimate the bill to be net revenue positive," says Fitch, "reflecting an expansion of the VAT base and higher taxes on petroleum products, automobiles and on sugar sweetened beverages, which would more than offset a lowering of personal income taxes."

Fitch estimates that the first component would add between 0.5% to 0.8% of GDP to government revenues in 2018, and keep the central government deficit below the ceiling of 3% of GDP in 2018 and 2019.

The government expects the entire tax reform package to increase revenues by 2% of GDP by 2019, with administrative mesure adding anouther 1% of GDP.     


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