PH economic program vindicated by Fitch’s ‘BBB’ rating

Espenilla’s assurance came after Fitch Ratings affirmed its investment grade rating of “BBB”, two levels above junk status, with Stable outlook on the Philippines Tuesday (File photo) (Photo By Bangko Sentral ng Pilipinas, CC BY-SA 4.0)

MANILA — Bangko Sentral ng Pilipinas (BSP) Governor Nestor A. Espenilla Jr. said the Monetary Board will continue to implement its price stability mission to help boost the domestic economy’s upward trajectory.

Espenilla’s assurance came after Fitch Ratings affirmed its investment grade rating of “BBB”, two levels above junk status, with Stable outlook on the Philippines Tuesday.

The ratings agency remains optimistic about the domestic economy due to the government’s low debt levels, the country’s net external creditor position, and the continued improvement of fiscal and monetary policies.

It forecasts growth, as measured by gross domestic product (GDP), to remain strong after the 6.8 percent output in the first quarter of 2018.

It expects domestic demand to continue to be a major factor in the economy’s growth, which is projected to be at 6.8 percent in the next two years.

Amid this, it cited the risk of overheating given the sustained rise of inflation, continued strong growth of credit, and increase in trade deficit.

Inflation averaged at 4.3 percent in the first half of the year surpassing the government’s 2 to 4 percent target.

Last June alone, the rate of price increases hit a multi-year level of 5.2 percent mainly due to the heavily-weighted food and non-alcoholic beverage index and the alcoholic beverages and tobacco index, with the latter due to increase in sin taxes.

Fitch, however, expects inflation to decelerate and average at 3.8 percent next year as the impact of the tax reforms dissipates.

The country’s trade deficit continues to widen due to strong rise in importation given the rising needs of the economy.

Fitch forecasts the country’s current account deficit to increase to 1.1 percent of GDP this year and 1.3 percent of GDP in 2019-20 from last year’s 0.8 percent of GDP on account of robust importation, particularly in relation to the government’s infrastructure program, and increase in oil prices.

Although these developments may dampen domestic growth, Fitch said policy tightening by the BSP “may contain these risks.”

Espenilla said monetary officials will continue to ensure price stability that is conducive to growth since this “has allowed the Philippines to remain resilient amid external headwinds and to remain as one of the fastest growing economies in the region.”

“This growth is sustainable under the auspices of the ‘Continuity Plus Plus’ agenda, where we not only build on strong frameworks, methods, and buffers already in place, but also undertake bold and purposeful financial sector reforms to make the banking and financial system and payments and settlements system more dynamic and truly inclusive,” he added.

Fitch also noted the current government’s bid to implement reforms with the success of the passage of the first package of tax reform — the Tax Reform for Acceleration and Inclusion (TRAIN) law.

Package 1A of the tax reform program lowered workers’ income taxes but its negative impact on government revenues is being addressed by excise tax hikes on petroleum products, tobacco and automobiles as well the introduction of excise taxes on sugar-sweetened beverages and cosmetics.

The debt rater expects the first tax reform package to boost revenues, which in turn is seen to increase its share from 15.6 percent of GDP in 2017 to 16.2 percent of GDP at the end of this year, and further to 16.7 percent of GDP next year.

Finance Secretary Carlos Dominguez III said Fitch’s latest decision “is another recognition of the bold economic policy of the Duterte administration to fix the flawed tax system for the first time in over 20 years and at the same time provide a steady revenue stream for its ‘Build, Build, Build’ infrastructure development initiative as well as for social programs that would accelerate poverty reduction and grow the middle class.”

Astro del Castillo, President and Managing Director of finance and investment company First Grade Finance, Inc., also said Fitch’s decision this week is a pat on the back for the current administration.

“It gives credibility to what the economic team has been doing,” he told PNA in an interview.