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March 25 (The following statement was released by the rating agency)
Fitch Ratings has affirmed the Philippines' Long-Term Foreign and Local Currency Issuer
Default Ratings at 'BBB-' and 'BBB' respectively. The Outlooks are Stable. The issue ratings on
Philippines' senior unsecured foreign and local currency bonds are also affirmed at 'BBB-' and
'BBB'. The Country Ceiling is affirmed at 'BBB' and the Short-Term Foreign
Currency IDR at 'F3'.
KEY RATING DRIVERS
The affirmation and Stable Outlook reflect the following factors:
- The Philippines has maintained strong economic growth, underpinned by a steady
inflow of overseas Filipinos' remittances, the expansion of the business process
outsourcing (BPO) industry and low interest rates. Fitch forecasts that real GDP
growth will average 6.5% in 2014 and 2015, following a 7.2% rise in 2013. The
Philippines' five-year average real GDP growth rate rose to 5.3% in 2013, well
above the median of 3.2% for the 'BBB' peer rating group (sovereigns rated
'BBB-', 'BBB' and 'BBB+').
- Fitch believes that the risk of an extended period of overheating, which could
lead to either excessive inflation or asset price bubbles, remains limited
despite the strong growth momentum. Headline CPI remains benign, rising 4.1% yoy
in February, which is near the centre of the central bank's 2013-14 inflation
target band of 4.0% +/- 1.0pp. However, a sustained boom in Philippines'
property market could potentially increase both economic and financial
volatility in the event of a large-scale downturn in prices.
- The fundamentals of the Philippines' banking sector remain stable as
capitalisation is high, funding and liquidity is healthy and loan-loss reserves
are rising. The banking sector has already implemented Basel III capital
standards at the beginning of 2014. These strengths should help offset the risks
of higher credit growth, particularly those related to the property market.
- The Philippines' external finances remain a key rating strength as its net
external creditor position reached 7% of GDP in 2013 due to continued current
account surpluses. This compared with the -12% median for peers rated in the
'BBB' range. This strength would help explain why the Philippines' exchange rate
and financial asset markets did not face the same degree of pressure as some
other 'BBB-' rated sovereigns (e.g. India, Indonesia and Turkey) during the
emerging markets sell-off over the summer of 2013.
- Public finances continue to gradually improve. The national government's
fiscal deficit fell to 1.4% of GDP in 2013 from 2.3% in 2012. Although the
fiscal deficit will widen as Typhoon Yolanda-related reconstruction spending
accelerates, Fitch projects the general government debt-to-GDP ratio will
nevertheless decline to 39% in 2014 from versus 40% in 2013, which will remain
in line with 'BBB' range peers. The stock of government debt also has an
extended maturity profile, standing at 10 years in 2013, which reduces rollover
- Governance standards - as measured by international indices such as the World
Bank's framework - remain weaker than 'BBB' range norms, but are not
inconsistent with a 'BBB-' rating as a number of sovereigns in this category
fare worse than the Philippines. Governance reform, however, has been the
centrepiece of the Aquino administration's policy efforts.
- The Philippines' average per capita income remains low at USD2,794 in 2013
compared with the 'BBB' range median of USD10,880. This measure, however, does
not capture the significant support to living standards provided by overseas
The Outlook is Stable. Consequently, Fitch's sensitivity analysis does not
currently anticipate developments with a high likelihood of leading to a rating
Future developments that could individually or collectively, result in positive
rating action include:
- An improvement in governance and the investment climate, which boosts both
domestic and foreign direct investment and overall productivity.
- Sustained, strong GDP growth that narrows income and development differentials
with 'BBB' range peers, without the emergence of imbalances.
- A broadening of the fiscal revenue base and/or a sustained decline in the
general government debt-to-GDP ratio.
Future developments that could individually or collectively, result in negative
rating action include:
- A period of economic overheating (e.g. high inflation or a property bubble)
and/or financial instability without appropriate fiscal and/or monetary policy
- Instability in the banking sector, which lead to a crystallisation of
contingent liabilities on the sovereign balance.
- Deterioration in governance standards and/or a reversal in reforms implemented
under the Aquino administration.
Fitch assumes that the Aquino administration will persist with its fiscal,
governance and social reform agenda.
The tapering of quantitative easing by the US Federal Reserve will be orderly,
with no sudden stop of capital flows to emerging economies.
Fitch assumes that the global economy will improve gradually over the forecast
period. The world's real GDP growth is projected at 2.9% and 3.2% in 2014 and
2015, compared with 2.3% in 2013