Bangko Sentral ng Pilipinas (BSP) Governor Eli M. Remolona Jr. has reassured the investing public and credit rating agencies that the Philippines will maintain a healthy foreign exchange (FX) buffer stock to protect the local currency against external pressures.
In a statement Tuesday, Nov. 26, after S&P Global Ratings (S&P) raised the Philippines’ credit rating outlook to “positive” from “stable” which means a possible rating upgrade to an “A-” within 24 months, Remolona said the country has ample reserves to protect against global economic fluctuations.
S&P’s sovereign credit ratings remain at “BBB+" for long-term and “A-2” for short-term sovereign credit ratings. An upgrade to “A-” will help lower borrowing costs and make the Philippines more attractive to foreign investors.
“A positive outlook reflects our improved assessment of institutional and policy settings in the Philippines,” said S&P, adding that “this improvement could lead to stronger sovereign support over the next 12-24 months if the Philippines' economy maintains its external strength, healthy growth rates, and that fiscal performance will strengthen.”
As of end-October 2024, the country has gross international reserves of $111.083 billion. The BSP considers this level as more than “adequate external liquidity buffer” that is equivalent to eight months’ worth of imports of goods and payments of services and primary income. It is also equivalent to about 4.4 times the country’s short-term external debt based on residual maturity.
According to Remolona, who welcomed the S&P decision, the “positive” outlook “reflects the work the government has done to improve the economic, fiscal, and monetary environment, enabling strong growth to continue.”
“The BSP remains committed to promoting price stability, financial stability, and an efficient payment system to support sustainable economic growth,” he added.
After upgrading the rating outlook on Nov. 26, S&P projects the local economy will grow by 5.5 percent this year, lower than the government’s six percent to seven percent goal. For the first three quarters of 2024, the gross domestic product expanded by 5.8 percent. For 2026, S&P expects local GDP to grow by six percent.
The credit rating agency projects the country’s inflation will also drop to 3.3 percent by end-2024 versus six percent in 2023, and settle at 3.1 percent in 2025. Both projections are within the BSP’s two percent to four percent target range for inflation.
As for the exchange rate, crucial in determining how strong the country’s buffer stock are, S&P forecasts the peso will likely end the year at P58.50 vis-à-vis the US dollar, and P57.15 in 2025. At the moment, the peso has depreciated to the P59 level against a strong greenback.
“The country's external position remains a credit strength reflecting rising foreign exchange reserves and low external debt,” said S&P.
Meanwhile, S&P praised the BSP's strengthened oversight of the financial sector which contributed to improved stability. The credit rating agency cited the country’s effective policy making, fiscal reforms, improved infrastructure, policy environment, and especially the recent passage of the Corporate Recovery and Tax Incentives for Enterprises to Maximize Opportunities for Reinvigorating the Economy (CREATE MORE) and the Public-Private Partnership (PPP) laws.
The CREATE MORE and the improved PPP showed the country’s prioritization of infrastructure development and economic reforms, said S&P.
“The Philippine government has generally enacted effective and prudent fiscal policies over the past decade. Improvements to the quality of expenditure, manageable fiscal deficits, and relatively low general government indebtedness testify to this,” it noted.
In improving the ratings, S&P cited the Philippines above-average economic growth potential, and that the growth has been supported by recovery in net export performance along with contained inflationary pressure. “Ongoing reform on the business, investment, and tax fronts should benefit growth over the next three to four years,” it said.
S&P forecasts the local economy will continue to grow at a strong rate of 6.2 percent a year over the next three years. This will be supported by private consumption and improving external demand. It further noted that GDP per capita could improve to $4,119 this year and to $4,478 in 2025.
An improved rating or outlook helps the government borrow at lower interest rates, allowing it to fund more services and infrastructure. This also helps businesses borrow at lower rates, helping fund expansion and job creation.
S&P raised the Philippines’ credit rating to “BBB+” in 2019, “BBB-” in 2013, and “BBB” in 2014. The “A-” rating is the entry level to the A ratings which means the country will be considered a sovereign with a strong capacity to meet its financial obligations.