S&P Global Ratings has affirmed its “BBB+” long-term and “A-2” short-term sovereign credit ratings with "stable" outlook on the Philippines as they see “solid” economic recovery despite near-term risks to growth while the fiscal profile is expected to gradually improve as recovery takes hold.

In a ratings statement on Wednesday, Nov. 29, the credit rating agency said the country’s economy has remained robust amid persistent global risks but it has decided to maintain its current investment grade due to the government’s ongoing fiscal consolidation, lower budget deficit and “stabilizing” debt burden.

It also noted that with a stable balance of payments and reserves, the country's external position “remains a rating strength” but continues to watch the current account deficits which have eroded net external assets.

As for the stable outlook, S&P said this comes from its expectation that the recovering economy will be sustained and fiscal deficits will decline over the next two years.

A credit rating translates to a sovereign issuer’s creditworthiness. As per S&P metrics, a “BBB” rating is an investment grade and indicates adequate capacity to meet financial commitments but there are also adverse economic conditions.

S&P forecasts the Philippine economy's real gross domestic product (GDP) will settle at 5.4 percent growth this year, which was below the government’s six percent to seven percent projection, compared to the actual 7.6 percent in 2022. For next year, it expects growth to climb to 5.9 percent, and further improve to 6.2 percent and 6.4 percent respectively, in 2025 and 2026.

“Slower growth of the world economy, including that of China and the U.S. (the Philippines' biggest trading partners), will also drag down the economy. Nonetheless, economic growth in the Philippines should be well above the average for peers at a similar level of development, on a 10-year weighted average per capita basis. The country has a diversified economy with a strong record of high and stable growth. This reflects supportive policy dynamics and an improving investment climate,” said S&P.

It estimates a GDP per capita of about $3,903 in 2023 and $4,273 in 2024. It said that real GDP per capita growth could average about 4.4 percent per year in the next three years.

S&P projects that the country’s debt-to-GDP ratio will improve to 52.4 percent from 54.2 percent in 2022. By 2024, it sees a debt-to-GDP ratio of 51.2 percent; 49.3 percent in 2025; and 47.2 percent in 2026.

“The Philippines' economic growth has been robust in 2023 following a strong recovery last year. The pace of the growth will, however, dip as inflationary pressures and sluggish macroeconomic global conditions persist.”

It noted that the GDP only grew by an average of 5.5 percent year-on-year in the first three quarters of 2023 compared to same period in 2022 of 7.7 percent.

But, S&P said inflation has eased and fell to 4.9 percent in October versus 5.8 percent in 2022. The year-to-date average of 6.4 percent is still above the government target of two percent to four percent. The high inflation will continue to constrain private consumption, it said.

Easing inflation path, fiscal consolidation

The credit watchdog estimates the country’s headline consumer price index (CPI) will average at 5.9 percent by end-2023 and continue its downward path in 2024 at 3.4 percent which is within the target. It is predicted to remain within the target at 3.2 percent and three percent in 2025 and 2026.

“Solid household and corporate balance sheets, and sizable remittance inflows underpin the Philippines economy's positive medium-term trajectory. Ongoing efforts to address infrastructure gaps, and improvements in the business climate through regulatory and tax reforms should also support growth in economic productivity,” it said.

In maintaining current credit scores, S&P has highlighted the government’s infrastructure development and fiscal reforms, particularly recent reforms on the public-private partnership (PPP) framework and the 2021 Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act, that reduced the corporate income tax rate and rationalized incentive schemes for investors. Currently, Congress is working on further refining the CREATE Act.

“The Philippines government has generally enacted effective and prudent fiscal policies over the past decade. Improvements to the quality of expenditure, manageable fiscal deficits, and low general government indebtedness testify to this. This track record of sustainable public finances helped the government accumulate fiscal resources to respond to the pandemic,” said S&P.

The rating agency estimates the country’s deficit will decline to 3.8 percent of GDP in 2023 from 4.4 percent last year. It projects a budget shortfall that will improve to 3.2 percent of GDP by 2024, 2.7 percent by 2025 and 2.3 percent by 2026.

However, measures countering high inflation “prevents a better fiscal outcome” and a “slightly lower growth expectations amid challenging external developments are an added constraint.”

Still, S&P said the fiscal shortfall “will continue to narrow over the coming years while the economy regains its footing and the government scales back stimulus measures.”

It cited the policy and fiscal consolidation strategy under the government's Medium Term Fiscal Framework or MTFF. Under the MTFF, the official growth targets are 6.5 percent to eight percent from 2024 until the end of the Marcos administration in 2028.

Stable outlook

Meanwhile, S&P’s stable outlook means it believes the Philippine economy will maintain “healthy growth rates” as the fiscal side continue to improve over the next 24 months.

The downside scenario to the current ratings and outlook is if the recovery is interrupted which will lead to what S&P called “a significant erosion of the country's long-term trend growth or an associated deterioration of the government's fiscal and debt positions.”

“Indications of downward pressure on the ratings would be: (1) annual changes in net general government debt that are consistently higher than 4% of GDP and the general government net debt stock exceeding 60% of GDP; or (2) interest payments exceeding 15% of revenue on a sustained basis,” it noted.

It added that “persistently large current account deficits leading to a structural weakening of the Philippines' external balance sheet would also exert downward pressure on the ratings.”

There could be an upgrade in sovereign ratings especially if the GDP grew faster than predicted.

“We may raise the ratings if the economy recovers much faster than we expect, and the government achieves more rapid fiscal consolidation. We may also raise the ratings if we assess a significant improvement in institutional settings that leads to a material enhancement in the Philippines' credit metrics,” said S&P.

For now, the credit watchdog said the ratings indicate country's “above-average” growth potential.

“The ratings benefit from the Philippines' strong external settings. Th Philippines' low GDP per capita relative to other investment-grade sovereigns and evolving institutional settings temper these strengths,” said S&P.

The reforms on the business, investment, and tax fronts should benefit growth over the next three to four years, it added.

“The ongoing economic recovery in the Philippines should facilitate a reduction in the general government deficit and a further stabilization of the debt burden starting 2023,” the rating agency also said. “It will, however, likely take a number of years for fiscal balances to recover to pre-pandemic levels. This is given the eroded fiscal headroom owing to the severe economic fallout of the pandemic and extraordinary responses from the government,” it added.