Fitch Ratings has affirmed the Philippine economy’s stable outlook with a BBB rating.
The sovereign ratings balance a favourable growth outlook, government debt levels, a net external creditor position and policies geared towards maintaining macro-stability against lower income per capita and weaker governance and business environment.
Fitch says a strong macroeconomic performance remains a rating strength, notwithstanding overheating risks.
Real GDP expanded by 6.8% in 1Q18 from 6.7% in 2017, supported by strong growth in investment and private consumption.
Growth in investment was driven by a pick-up in the public-infrastructure program ast domestic demand to maintain strong growth of 6.8% in both 2019 and 2020, which would maintain the Philippines’ place among the fastest-growing economies in the Asia-Pacific region.
Fitch says the Philippines’ estimated five-year average real GDP growth of 6.5% at end-2018 will remain far above the current ‘BBB’ median of 3.1%. However, the economy faces some overheating risks, evident from a recent rise in inflation, rapid credit growth and a widening trade deficit, although steps taken by the Bangko Sentral ng Pilipinas (BSP) to tighten monetary policy may contain these risks.
Headline inflation increased to 4.3% yoy in 1H18 from 2.9% in 2017. Fitch expects consumer price inflation to average around 4.4% in 2018, above the BSP’s official band of 2%-4%, 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.
Fitch expects the the Philippines’ current account deficit to widen to -1.1% of GDP in 2018 from -0.8% of GDP in 2017, driven by continued strong growth in the import of capital goods associated with the government’s public-investment programme and higher oil prices.
The business-process outsourcing sector’s continued strong receipts and steady remittance inflows are offsetting these factors and helping to contain a further widening of the current account deficit. We expect the deficit to widen further to around -1.3% of GDP in 2019 and 2020. Risks to this outlook stem from a further acceleration of imports.
Foreign direct investment (FDI) inflows rose to USD10.0 billion in 2017 from USD8.3billion in 2016. Approved FDI investments declined from a year ago but realised FDI inflows rose by around 43.5% yoy in 1Q18 to USD2.2 billion, reflecting still-strong foreign investor sentiment.
High foreign-exchange reserves continue to act as an important buffer to external shocks. Foreign-exchange reserves had fallen to USD77.7 billion by end-June 2018 from USD81.6 billion at end-2017 due to portfolio outflows and intervention by the BSP.
However, reserves continue to cover around seven months of current external payments (CXP). In addition, the BSP’s flexible exchange-rate policy, evident from a depreciation of the peso by around 6% against the US dollar over the past year, should prevent a sharp decline in reserves.