S&P affirms PH rating at ‘BBB+/A-2’ with stable outlook

S&P Global affirmed the Philippines’ “BBB+” long-term and “A-2” short-term sovereign credit ratings with stable outlook in view of the country’s sustained economic recovery and strong external position.

In its report dated November 28, 2023, S&P Global noted the Philippines’ above-average economic growth potential compared to its peers, which will be supported by stable macroeconomic fundamentals driven by the government’s sound macroeconomic policy and fiscal consolidation strategy through the country’s first-ever Medium-Term Fiscal Framework (MTFF).

The MTFF was crafted by the economic team led by Finance Secretary Benjamin E. Diokno within the Marcos, Jr. administration’s first month in office.

“The Marcos, Jr. administration is committed to pursuing the path of fiscal consolidation and introducing sound policies and structural reforms to strengthen the country’s fiscal and economic position to maintain if not improve this favorable assessment,” Secretary Diokno said.

S&P projects that the Philippines will achieve a moderate real gross domestic product (GDP) growth of 5.4 percent in 2023 considering the impact of external macroeconomic developments and a high base.

Such external factors include the projected slower world economic growth, particularly from the Philippines’ largest trading partners––China and the US.

S&P also forecasts the country’s growth to increase to 5.9 percent in 2024, 6.2 percent in 2025, and 6.4 percent in 2026.

The credit rater expects that the Philippines’ economic growth will remain well above the average among its peers due to the government’s ongoing efforts to address infrastructure gaps and improvements in the business climate through regulatory and tax reforms, which will further support expansion in economic productivity.

“That’s an accomplishment of the PBBM administration. In a sea of downgrades, the international rating agencies continue to affirm their confidence in the Philippine economy’s macroeconomic fundamentals. We continue to pursue the Road to A under President Marcos, Jr.’s administration,” Secretary Diokno said in a statement.

The government will continue to implement the necessary policies and measures to help ensure that the country’s economic growth will be stronger than S&P’s moderate growth forecasts as the government aims to achieve the MTFF economic growth target of 6.5 percent to 8.0 percent from 2024 to 2028.

In particular, S&P recognized the government’s efforts to prioritize infrastructure development and fiscal measures and cited crucial reforms such as the public-private partnership (PPP) framework and the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act.

“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 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,” the report stated.

With this, the credit rater underscored the importance of tax reforms in ensuring that public finances remain sustainable, while infrastructure and social needs are addressed.

S&P further stated that the Philippine government has so far achieved moderate success with its Comprehensive Tax Reform Program.

Meanwhile, the stable outlook stems from S&P’s expectation of sustained economic recovery and declining fiscal deficits over the next two years.

S&P reports that the Philippines’ strong economic recovery over the past two years will help lower the general government (GG) deficit estimated at 3.8 percent of GDP in 2023, from 4.4 percent in 2022.

The credit rater forecasts the GG deficit to average 2.7 percent of GDP over the next three years, and the net GG debt to gradually come down to about 41 percent by 2026 as fiscal consolidation takes hold.

Under the MTFF, the government aims to reduce the national government deficit-to-GDP ratio to 3.0 percent by 2028. Since the bulk of the GG operational balances are from the national government, the Department of Finance (DOF) is in the position that this is tantamount to further improvement in GG fiscal balances over the medium term.

The DOF further notes that the GG net operating balance was at 0.0 percent of GDP in 2022 when the national government deficit was at 7.3 percent of GDP. In the first three quarters of 2023, NG deficit-to-GDP ratio was further reduced to 5.7 percent, better than the full-year target of 6.1 percent

The Philippines’ reserves have also started to accumulate in 2023 due to a lower import bill and recovery in electronic exports from the Philippines, providing a strong external buffer. Reserves amount to US$ 101.1 billion as of end-October 2023, which can cover seven to eight months of current account payments.

This level remains well above the International Monetary Fund (IMF)’s Assessing Reserve Adequacy (ARA) metric at 1.9 in 2023, remarkably higher than China’s 0.7 as well as Malaysia and Indonesia both at 1.1.

Since the global financial crisis, the ratio of the country’s gross international reserves relative to the IMF’s ARA metric has been relatively higher than selected Asian and emerging market economies.

The country also has the lowest external debt-to-GDP ratio among the ASEAN-5 countries with available data.

As of end-Q2 2023, the Philippines’ external debt-to-GDP ratio was only 28.5 percent, lower compared to Indonesia’s almost 30 percent, Thailand’s almost 40 percent, and Malaysia’s more than 60 percent. This supports the view that the Philippines has a relatively strong external position as it is less vulnerable to adverse external shocks.

S&P also noted the country’s continuing robust personal remittance inflows, which reached an all-time high of US$ 36.1 billion in 2022. As of September 2023, cumulative inflows of US$ 27.2 billion are up by 2.8 percent year-on-year.

The credit rating agency particularly highlighted that the country’s solid household and corporate balance sheets, and sizable remittance inflows underpin the Philippine economy’s positive medium-term trajectory.

The DOF also emphasizes the country’s improving labor and employment conditions that are supporting private consumption.

The Philippines’ unemployment rate is already lower than the pre-pandemic level at 4.5 percent in September 2023 while the underemployment rate decreased to 10.7 percent, the lowest since 2005.

Foreign direct investment (FDI) levels, on the other hand, are expected to remain stable in 2023 due to the government’s implementation of recent reforms which allow foreign enterprises to invest in sectors such as telecommunications, power generation, renewable energy, and transportation.

These game-changing structural reforms include the CREATE Act and amendments to the Public Service Act, Retail Trade Liberalization Act, and Foreign Investments Act as well as the revised implementing rules and regulations of the Renewable Energy Act.

The economic managers are closely monitoring the implementation of these reforms to help boost investments and realize the country’s growth targets.