To attain investment grade, Fitch says PH growth must be sustainable

By Prinz P. Magtulis, The Philippine Star

Posted at Jan 09 2013 07:39 AM | Updated as of Jan 09 2013 07:13 PM

MANILA, Philippines - The Philippines will have to prove its recent growth momentum is “structural” in nature, something that is sustainable over the long term to attain its much-coveted investment grade status, debt watcher Fitch Ratings said.

“Basically, we are trying to look through the cycle and see if there is structural difference suggesting higher GDP growth… We are looking if there is actually structural break rather than short term upswings in 12 to 18 months,” said Philip McNicholas, director of Asia-Pacific Sovereigns, in a teleconference.

“The question now is sustainability of higher growth outcomes,” he added.

The country is rated BB+, with a stable outlook, under Fitch’s metrics, putting it one notch below investment grade which the Aquino administration is optimistic of achieving this year.

Fitch’s evaluation of the Philippines is similar to that of two other major credit raters, Moody’s Investors Service and Standard & Poor’s Rating Services, although the latter put its outlook to “positive” last month, suggesting an upgrade this year.

In June, the New York-based credit rater affirmed the country’s rating while also saying that reforms to generate more state revenues and sustain growth shall serve as an upward pressure to its assessment.

The passage of the “sin” tax reform bill— targeted at raising tobacco and liquor taxes— was seen as “potentially positive” to our credit profile, “although execution risks remain,” Mc Nicholas explained. The law aims to generate additional P33.96 billion in revenues this year.

General government debt has also continued to go down, McNicholas said, with the ratio of 40 percent of gross domestic product (GDP) in line with the country’s rating peers. General government debt includes both national and local government liabilities.

While public finances are “no longer considered a weakness,” McNicholas said much remains to be done to address “structural problems” that result into lower revenues as a proportion of the size of the economy.

Revenue-to-GDP ratio rose to 14.7 percent as of the third quarter last year from 14.5 percent by end-2011, official data showed. In 2010, the ratio was at 14.2 percent, which Fitch had said was the third lowest among BB+-rated economies.

On a positive note, growth of 6.5 percent as of September beat Fitch’s 2012 projection of 5.5 percent, while inflation continues to be “benign” at 3.2 percent last year, allowing the central bank to maintain an “accommodative” stance.

“When I mentioned sustainability in terms of GDP outcomes and so forth, essentially the focus… is on longer term outlook to GDP growth trajectory,” McNicholas said.

But upgrade hopes this year are not completely gone for the Philippines, said Fitch’s Asia-Pacific Sovereigns head Andrew Colquhoun.

“I want to stress that stable does not mean static. There are upwards and downwards pressures to ratings,” he said.