Fitch Revises the Philippines’ Outlook to Positive; Affirms at ‘BBB-‘

Fitch Ratings has affirmed the Philippines’ Long-Term Foreign- and Local-Currency IDRs at ‘BBB-‘ and ‘BBB’ respectively, and the Outlook has been revised to Positive.

The issue ratings on the Philippines’s senior unsecured Foreign- and Local-Currency bonds are also affirmed at ‘BBB-‘ and ‘BBB’ respectively. The Country Ceiling is affirmed at ‘BBB’ and the Short-Term Foreign-Currency IDR at ‘F3’.

KEY RATING DRIVERS The revision of the Outlook on the Philippines’ IDRs to Positive reflects the following key rating drivers: – Governance standards and competitiveness indicators, as measured by international organisations, have shown steady improvement through the Aquino administration.

Global competitiveness, as ranked by the World Economic Forum, has risen to a level comparable to ‘BBB’-rated peers. Indicators for corruption, transparency and economic freedom have also improved substantially.

Evidence that governance improvements can be sustained beyond the next election cycle would be positive for the credit. The sovereign rating of ‘BBB-‘ for the Philippines also reflects the following key rating drivers: – Economic growth continues to outperform ‘BBB’-rated peers, and favourable demographics support the medium-term growth outlook.

Fitch forecasts real GDP to grow at 5.6% in 2015, as domestic demand remains robust even as external demand weakens. The Philippines’ total dependency ratio is projected to fall over the next three decades, in contrast to most other ‘BBB’-rated peers and other economies across the region. – External finances continue to be key credit strength.

The Philippines has run current account surpluses since 2003, underpinned by high levels of worker remittances and revenue from the business process outsourcing industry. Fitch expects the current account surplus to narrow to 3.5% in 2015, but high enough for the country to reinforce its position as a net external creditor.

Fitch expects the Philippines’ strong external finances will provide resilience against potential shifts in global investor sentiment, for example following the tightening of US monetary policy. – The Philippines has low and falling public debt. General government debt is 36.4% of GDP in 2014, compared with the ‘BBB’ median of 42.4% of GDP.

Fitch forecasts a fiscal deficit of 1.7% of GDP in 2015, widening from 0.6% of GDP in 2014 due to better execution of expenditure plans and higher spending in the run-up to the election. This level of deficit is consistent with a steady downward trajectory of government debt, at the current rate of nominal GDP growth.

The country’s narrow government revenue base reduces its ability to manage fiscal balances in the event of a shock. The Philippines’ general government revenue, based on unconsolidated figures provided by the authorities, is 21.5% of GDP in 2014.

This is low relative to the ‘BBB’-rated median of 28.6%, typically calculated from consolidated figures. – Low per capita incomes are a structural weakness. GDP per capita income at USD 2,836 in 2014 is low compared with the ‘BBB’ median of USD10,654.

Gross national income per capita is higher due to relatively large inflows of remittances from overseas Filipino workers, but still below ‘BBB’ peers. – There is limited clarity over macro-prudential risks stemming from the real estate market.

Private sector credit growth has moderated from 19.9% YoY at end-2014 to 14.1% in June 2015, but still growing at a brisk pace. Lack of data on property prices and affordability indicators make it difficult for Fitch to assess the effect of credit growth on the real estate market.

Data published by Colliers International show average land values in the Makati Central Business District have risen by more than 50% since the end of 2012, although relatively low vacancy rates and strong growth in rents suggest some fundamental support for current price levels.

The Bangko Sentral ng Pilipinas (BSP) plans to release a residential real estate price index later in the year. The proactive supervision and regulation of the BSP, particularly on the introduction of real estate stress tests and caps on mortgage loan values relative to collateral, may help to contain risks.

RATING SENSITIVITIES The main factors that individually or collectively might lead to positive rating action are: – – Evidence that improvement in governance standards over the Aquino administration can be sustained following a change in government. – Continued strong GDP growth without the emergence of imbalances. – A broadening of the general government revenue base that lends greater stability to the government finances. The rating Outlooks are Positive.

Hence, Fitch does not anticipate a material probability of negative action over the forecast period. However, the main factors that could see the ratings revert to Stable Outlook are: – Deterioration in governance standards or a reversal in reforms that were implemented under the Aquino administration. – Instability in the financial system, possibly triggered by a sustained period of excessive credit growth, could be considered credit negative. KEY ASSUMPTIONS – Fitch assumes that an increase in US policy rates would not lead to a sudden stoppage in capital flows to emerging economies.

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