Credit watcher sees “overheating risk” for Philippine economy

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Despite sticking to its investment grade and stable outlook on the Philippines, US-based rating agency Fitch said the country’s economy was in danger of running too hot, evident from a recent rise in inflation, rapid credit growth and a widening trade deficit.

Still, Fitch kept the rating for the Philippines sovereign debt a notch above minimum investment grade, noting that the risks might have been contained so far by the central bank’s decision to tighten monetary policy.

The Philippines’ long-term foreign-currency issuer default rating being kept at ‘BBB’ signifies adequate capacity for payment of financial commitments.

The debt watcher also said that strong macroeconomic performance “remains a rating strength” of the Philippines. It also expects the government’s balance sheet to remain healthy following the enactment of the tax reform law that aims to partly fund the administration’s ambitious infrastructure programme, which is expected to raise the government’s capital expenditure to 7.3 per cent of GDP by 2022.

However, that could be impaired by adverse business or economic conditions, Fitch said, citing the Philippines’ low income per capita and weaker governance and business environment as key concerns. The agency also flagged the recent Supreme Court ruling that increases the share of local government units’ internal revenue allotments, saying the high tribunal’s decision could create “challenges for effective public-finance management.”

Fitch also noted that the current inflation regime remains elevated “due in large part to higher commodity prices and a recent increase in excise taxes associated with the tax reform package passed at the end of last year.”

However, “the one-off impact of the tax hikes is likely to dissipate in 2019, and therefore we expect average inflation to fall to around 3.8 per cent in 2019,” the agency said.

Real GDP in the Philippines expanded by 6.8 per cent in the first quarter of 2018 from 6.7 per cent in 2017, supported by strong growth in investment and private consumption. Growth in investment was driven by a pick-up in the public-infrastructure programme.

“We expect domestic demand to maintain strong growth of 6.8 per cent in both 2019 and 2020, which would maintain the Philippines’ place among the fastest-growing economies in the Asia-Pacific region,” Fitch said, adding that the Philippines’ estimated five-year average real GDP growth of 6.5 per cent at end-2018 will remain far above the current ‘BBB’ median of 3.1 per cent.

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Reading Time: 2 minutes

Despite sticking to its investment grade and stable outlook on the Philippines, US-based rating agency Fitch said the country’s economy was in danger of running too hot, evident from a recent rise in inflation, rapid credit growth and a widening trade deficit.

Reading Time: 2 minutes

Despite sticking to its investment grade and stable outlook on the Philippines, US-based rating agency Fitch said the country’s economy was in danger of running too hot, evident from a recent rise in inflation, rapid credit growth and a widening trade deficit.

Still, Fitch kept the rating for the Philippines sovereign debt a notch above minimum investment grade, noting that the risks might have been contained so far by the central bank’s decision to tighten monetary policy.

The Philippines’ long-term foreign-currency issuer default rating being kept at ‘BBB’ signifies adequate capacity for payment of financial commitments.

The debt watcher also said that strong macroeconomic performance “remains a rating strength” of the Philippines. It also expects the government’s balance sheet to remain healthy following the enactment of the tax reform law that aims to partly fund the administration’s ambitious infrastructure programme, which is expected to raise the government’s capital expenditure to 7.3 per cent of GDP by 2022.

However, that could be impaired by adverse business or economic conditions, Fitch said, citing the Philippines’ low income per capita and weaker governance and business environment as key concerns. The agency also flagged the recent Supreme Court ruling that increases the share of local government units’ internal revenue allotments, saying the high tribunal’s decision could create “challenges for effective public-finance management.”

Fitch also noted that the current inflation regime remains elevated “due in large part to higher commodity prices and a recent increase in excise taxes associated with the tax reform package passed at the end of last year.”

However, “the one-off impact of the tax hikes is likely to dissipate in 2019, and therefore we expect average inflation to fall to around 3.8 per cent in 2019,” the agency said.

Real GDP in the Philippines expanded by 6.8 per cent in the first quarter of 2018 from 6.7 per cent in 2017, supported by strong growth in investment and private consumption. Growth in investment was driven by a pick-up in the public-infrastructure programme.

“We expect domestic demand to maintain strong growth of 6.8 per cent in both 2019 and 2020, which would maintain the Philippines’ place among the fastest-growing economies in the Asia-Pacific region,” Fitch said, adding that the Philippines’ estimated five-year average real GDP growth of 6.5 per cent at end-2018 will remain far above the current ‘BBB’ median of 3.1 per cent.

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