Delivering on good credit rating


Managing public governance deficit

Certainly it was exhilarating news last Sunday, that decision of Fitch Ratings to affirm the Philippines’ investment grade rating at BBB, a notch above the minimum investment grade. Equally significant is the stable outlook that Fitch maintained for the country.

Such a rating action of one of the three major credit rating agencies rewards us for all the efforts of government, business and the rest of the civil society to address the debilitating economic scarring of the pandemic a few years ago and to come to grips with the thinning fiscal space. We did not do badly in achieving respectable economic growth, bringing down inflation and mopping up slippages in public finance.

The marching order  is to deliver on this recent favorable credit rating.

Fitch has a list of the Philippines’ macro strengths as well as structural weaknesses. Keeping the BBB label and stable outlook  means Fitch recognizes our strong medium-term growth. The significance of such an outlook hinges on our ability to reduce government debt to GDP ratio in the next few years. And for us, the imperative of securing cheap and reliable energy, good governance, strong connectivity throughout the islands and optimizing our demographic advantage.

What sets us back? 

We have a low GDP per capita which signals sustained demand for resources to fund various social amelioration projects away from infrastructure and to us, debt servicing ability. Fitch also argues that governance standards are weaker than those of its BBB peers even as it agrees World Bank indicators of good governance could be overdoing it.

On growth prospects, Fitch shares the World Bank’s cautious optimism with its 5.8-percent GDP forecast for 2024. It was correct for Fitch to have attributed last year’s slowdown to the growth-boosting, pandemic-mitigating public expenditure and high inflation. Spending on the pandemic is dissipating this year while high price pressure restrained private consumption and investment. While El Niño could be bad for agriculture, power and water supply as it was, La Niña could also limit business activities in the second half of 2024. 

The challenge to our policymakers? 

Fitch expects this medium-term expectation to be supported by what it calls “large” investment in infra and reforms to foster trade and investment, including renewed interest in public-private partnership (PPP). 

A good plank to this positive growth outlook is gradual fiscal consolidation. Fiscal sustainability ensures continued infrastructure and social services that all should result in stronger business activities. Higher fiscal deficit is not per se bad, as long as growth is secured and a fiscal consolidation plan is in place. Well, the Philippines is into it, and the remaining task is to pursue it, and pursue it well.
Fitch in this latest watch believes “there is some risk of a further fiscal slippage given the government’s continued focus on economic growth and the approach of mid-term elections in May 2025.” Fitch implicitly hopes that the focus on tax administration will produce good results.

We have time and again pointed out that keeping public spending at 60 percent of GDP, or below, secures our overall economic well-being. This is basically the same message of Fitch to the authorities. If this is delivered, then Fitch is justified in saying that our debt profile is stable. 

On external payments position, Fitch zeroed in on the current account deficit which is indicative of an emerging country’s reliance on foreign saving. Fitch says it is narrowing, and its expectation is that it will drop to below 2.0 percent of GDP by next year from last year’s 2.6 percent. This is very achievable with the continuing growth of the economy and the harnessing of indigenous, renewable power sources. 

Fitch also considered the country’s external financing as favorable because it comes from long-term borrowing and foreign direct investment (FDI). The latest good news is that our gross international reserves (GIR) hit a historic high of $105 billion in May. This should further convince the credit rating agency of the country’s strong ability to repay its external obligations.

For obvious reason, Fitch recognized that inflation pressures are moderating. While upside risks continue to threaten price stability, the BSP’s initial success in inflation management was apparent with the sustained retreat of core inflation since 2023 up to May 2024. Contrary to some views, the BSP’s hawkish monetary policy is yielding good results. The challenge is to intensify on those non-monetary measures including stronger supply chains and lower but time-varying tariff duties on imported commodities.

Fitch also commended the BSP’s inflation-targeting framework and flexible exchange-rate regime. They are sound, and they are credible. The government’s use of BSP resources during the pandemic was controlled and shortly reversed while the calls for generalized fuel subsidies were justifiably resisted.   

Finally, Fitch observed that the Marcos Jr. administration “has continued to advance structural economic reforms with the overarching aim of catalyzing private investment.” Much space for growth has been gained with the improvements introduced in the PPP law, Foreign Investment Act and Public Service Act. If this commitment to sustain game-changing economic reforms is upheld, we have a good chance of going back to the old growth path prior to the pandemic of 2020.

Fitch rating action also showed some rating sensitivities. In the first place, a stable outlook means stable, neither an upgrade nor a downgrade is forthcoming. But the stable outlook could also turn positive if strong adherence to macroeconomic sustainability is maintained, fiscal and debt metrics show constant improvements relative to GDP and finally, governance standards are firmed up. 

While this recent affirmation from Fitch is good news, the challenge is without doubt to deliver on those macroeconomic concerns that could bring about better future for our country and people. 

There is an enchanting whole new world of difference when we are rated A or A-. It means we have attained that level of growth that job opportunities are more plentiful and lower inflation promotes higher purchasing power for our people.