Philippines gets Fitch upgrade; investors shrug off drug war

MANILA, Philippines — The brutal drug war has not shaken investor confidence and macroeconomic fundamentals remain strong, prompting international debt watcher Fitch Ratings to upgrade the Philippines’ credit rating yesterday. 

It was the first such upgrade for the Philippines by Fitch since March 2013 and the first since President Duterte assumed office last year. It put the agency’s sovereign credit rating for the Philippines at par with those of S&P Global Ratings and Moody’s Investors Service. 

The improvement from the minimum investment grade of “BBB-” to “BBB” was seen as a vote of confidence in Duterte’s government amid his controversial war on illegal drugs and criminality. The one-notch upgrade placed the Philippines at par with Italy and higher than Indonesia.

Fitch cited the Philippines’ sustained economic expansion, the tax reform plan and bold infrastructure program under the Duterte administration.

Credit ratings are a measure of a country’s willingness and ability to pay debts as they fall due. The new rating is assigned a “stable” outlook, which means there are no pressing factors that could trigger an adjustment within the near term.

Fitch said investor sentiment remained strong as shown by solid domestic demand and inflows of foreign direct investment despite peace and order concerns such as alleged extrajudicial killings in connection with the war on drugs.

“There is no evidence so far that incidents of violence associated with the administration’s campaign against the illegal drug trade have undermined investor confidence,” the rating agency said.

Over the medium term, Fitch said it expects higher infrastructure spending under the government’s public investment program to support continued robust growth.

For 2018 and 2019, Fitch forecasts real gross domestic product growth of 6.8 percent for the Philippines, adding that the country is expected to maintain its place among the fastest-growing economies in the Asia-Pacific. Philippine GDP grew by a faster-than-expected 6.9 percent in the third quarter.

Palace welcomes upgrade

Malacañang yesterday welcomed Fitch’s move and attributed it to the government’s campaign against corruption and crime.

“This is yet another affirmation that the Duterte administration’s focus on law and order as well as the fight against crime and corruption (are) the right directions,” Presidential Communications Secretary Martin Andanar said in a statement.

Andanar cited Fitch’s remark that there is no evidence so far that incidents of violence associated with the anti-illegal drugs campaign have undermined investor confidence.

“This, together with the country’s strong macroeconomic performance and sound policies supporting high and sustainable growth rates, gives us basis to hope that the country will continue to rise further in the ranks of Asian economies,” he said.

Steady, strong economy

The National Economic and Development Authority (NEDA) also welcomed the credit rating upgrade, saying it reflects steady and strong economic performance and investor confidence.

“This news is a welcome development, especially at a time that we are seeing a sustained improvement in government spending,” Socioeconomic Planning Secretary Ernesto Pernia said.

The credit rating upgrade, he said, will encourage the government to implement reforms at a faster pace.

“The positive outlook and ratings from global credit watchers encourage the whole of government to be more efficient and swift in executing the needed policy reforms, programs and projects laid out in the Philippine Development Plan 2017-2022,” Pernia said.

“We urge everyone to support critical reforms… needed to sustain and even ramp up economic growth,” he added.

Among these reforms is the Tax Reform for Acceleration and Inclusion Act or TRAIN, which reduces income tax and provides for offsetting measures. It will be implemented as soon as it is enacted into law before the end of the year.

“This tax reform package will boost the country’s revenue-to-GDP ratio; fund the Build, Build, Build program and increase the spending capacity of the poor and the working Filipino,” Pernia said.

In its report, Fitch noted, however, that while “expectations of default risk are currently low” and “capacity for payment of financial commitments is considered adequate,” adverse business or economic conditions are more likely to impair the capacity.

Pernia said the government is intent on easing the entry of foreign investments to take advantage of outside interest in the country.

Malacañang is currently reviewing the 11th Regular Foreign Investment Negative List, which eases restrictions on practice of professions, mass media, communications, educational institutions and health-related sector.

Meanwhile, Budget Secretary Benjamin Diokno said the upgrade supports the growing consensus that “the Philippines is one of the fastest growing countries not only in the fast-growing Asia-Pacific region but also in the entire world.”

“As much as we are thankful, we will not rest on our laurels and will continue to persevere for the welfare of our constituents. Ultimately, this credit upgrade is only a means to an end for our overarching objectives – growth with equity evidenced by lower poverty levels, solid job creation and higher human development.” – Alexis Romero, Czeriza Valencia