Fitch: Resilient PHL economy prompted investment grade rating

Hong Kong — Fitch Ratings upgraded the Philippines' Long-Term Foreign-Currency Issuer Default Rating (IDR) to 'BBB-' from 'BB+'. The Long-Term Local-Currency IDR has been upgraded to 'BBB' from 'BBB-'. The Outlooks on both ratings are Stable. The agency has also upgraded the Country Ceiling to 'BBB' from 'BBB-' and the Short-Term Foreign-Currency IDR to 'F3' from 'B'. Key rating drivers The upgrade of Philippines' sovereign ratings reflects the following factors:

The Philippines' sovereign external balance sheet is considered strong relative to 'A' range peers, let alone 'BB' and 'BBB' category medians. A persistent current account surplus (CAS), underpinned by remittance inflows, has led to the emergence of a net external creditor position worth 12 percent of GDP by end-2012, up from 6 percent at end-2010. Remittance inflows were worth 8 percent of GDP in 2012 and proved resilient even through the shock of the global financial crisis. Fitch expects a rising import bill stemming from strong domestic demand to lead to a narrower CAS and to stabilize the net external creditor position at a strong level through to 2014.

The Philippine economy has been resilient, expanding 6.6 percent in 2012 amid a weak global economic backdrop. Strong domestic demand drove this outturn. Fitch expects GDP growth of 5.5 percent in 2013. The Philippines has experienced stronger and less volatile growth than its 'BBB' peers over the past five years.

Improvements in fiscal management begun under President Arroyo have made general government debt dynamics more resilient to shocks. Strong economic growth and moderate budget deficits have brought the general government (GG) debt/GDP ratio in line with the 'BBB' median. The sovereign has taken advantage of generally favorable funding conditions to lengthen the average maturity of GG debt to 10.7 years by end-2012 from 6.6 years at end-2008. The foreign currency share of GG debt has fallen to 47% from 53% over the same period.

Favorable macroeconomic outturns have been supported in Fitch's view by a strong policy-making framework. Bangko Sentral ng Pilipinas' (BSP) inflation management track record and proactive use of macro-prudential measures to limit the potential emergence of macroeconomic and financial imbalances is supportive of the credit profile. Inflation has been in line with 'BBB' peers on average over the past five years.

Governance standards, as measured in international indices such as the World Bank's framework, remain weaker than 'BBB' range norms but are not inconsistent with a 'BBB-' rating as a number of sovereigns in this rating category fare worse than the Philippines. Governance reform has been a centrepiece of the Aquino administration's policy efforts. Entrenching these reforms by 2016 is a policy priority of the government.

The Philippines' average income is low ($2,600 versus 'BBB' range median of $10,300 in 2012), although this measure does not account directly for the significant support to living standards from remittance inflows. The country's level of human development (as measured in the United Nations Development Program's index) is less of an outlier against 'BBB' range peers.

The Philippines had a low fiscal revenue take of 18.3 percent of GDP in 2012, compared with a 'BBB' range median of 32.3 percent. This percent limits the fiscal scope to achieve the government's ambition of raising public investment. The recent introduction of a "sin tax," against stiff political opposition, will likely lead to some increment in revenues and underlines the administration's commitment to strengthening the revenue base.

Rating sensitivities The main factors that could lead to a positive rating action, individually or collectively, are:

Sustained strong GDP growth that narrows income and development differentials with 'BBB' range peers. An uplift in the investment rate that enhances growth prospects without the emergence of macroeconomic imbalances.

Broadening of the fiscal revenue base, as well as further improvements in the structure of the Philippine sovereign debt stock.

The main factors that could lead to a negative rating action, individually or collectively, are:

A reversal of reform measures and deterioration in governance standards.

Sustained fiscal slippage, leading to a higher fiscal debt burden.

Deterioration in monetary policy management that allows the economy to overheat.

Instability in the banking sector, leading to a crystallization of contingent liabilities on the sovereign balance sheet.

Key assumptions The ratings and outlooks are sensitive to a number of assumptions. The agency assumes the Aquino administration will persist with its fiscal, governance and social reform agenda. Fitch estimates trend GDP growth for the Philippines in a range of 5 percent-5.5 percent. The ratings incorporate an assumption that the Philippines is not hit by a severe economic or financial shock sufficient to cause a significant contraction in GDP and trigger stress in the financial system. Fitch assumes that there is no materialization of severe risks to global financial stability that could impact emerging market economies, such as a breakup of the euro zone or a severe economic crisis in China. — Fitch Ratings