S&P Global affirms Philippines credit rating

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

“The stable outlook reflects our expectation that the Philippine economy will maintain healthy growth rates and the fiscal performance will materially improve over the next 24 months,” S&P Global said in a Nov. 28 report.

It cited the Philippines’ above-average economic growth potential compared to its peers, supported by stable macroeconomic fundamentals, the government’s sound macroeconomic policy and fiscal consolidation strategy through the country’s first-ever Medium-Term Fiscal Framework (MTFF).

“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,” Diokno said Wednesday.

S&P said it expects the Philippines to 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.

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

“Economic recovery for the Philippines post the pandemic has remained robust, but near-term risks presented by global conditions persist,” it said.

S&P said the ratings on the Philippines reflect the country's above-average economic growth potential, which should drive constructive development outcomes and underpin broader credit metrics.

The ratings benefit from the Philippines' strong external settings. The Philippines' low GDP per capita relative to other investment-grade sovereigns and evolving institutional settings temper these strengths.

It said the government's fiscal and debt settings deteriorated due to the economic fallout from the pandemic and the associated extraordinary policy responses. Fiscal buffers built through a long record of prudence before the pandemic have thinned, but we expect a consolidation as the economy recovers.

It said ongoing reform on the business, investment and tax fronts should benefit growth over the next three to four years.

“We expect the Marcos administration to continue to adhere to the well-established medium-term fiscal framework that has delivered constructive development outcomes,” it said.

It said inflation showed signs of easing in recent months, decelerating to 4.9 percent in October 2023 from 5.8 percent in 2022. Average inflation from January to October remains elevated at 6.4 percent, above the upper bound of the central bank's target of 2 percent to 4 percent.

“Slower growth of the world economy, including that of China and the U.S. (the Philippines' biggest trading partners), will also drag down the economy. Nonetheless, economic growth in the Philippines should be well above the average for peers at a similar level of development, on a 10-year weighted average per capita basis. The country has a diversified economy with a strong record of high and stable growth. This reflects supportive policy dynamics and an improving investment climate.

It expects GDP per capita to rise to about $3,903 in 2023 and $4,273 in 2024, in our view. Real GDP per capita growth could average about 4.4 percent per year over 2023-2026, it said.

“As economic growth recovers post-pandemic, we estimate the Philippines' fiscal deficit will narrow to 3.8 percent of GDP this year, from 4.4 percent in 2022. The government's need to support measures countering high inflation prevents a better fiscal outcome. Slightly lower growth expectations amid challenging external developments are an added constraint.

“We believe the fiscal shortfall will continue to narrow over the coming years while the economy regains its footing and the government scales back stimulus measures. We expect the medium-term fiscal framework (MTFF) revealed by the Marcos administration last year to guide the consolidation process,” it said.

“However, restoring the fiscal and debt settings to pre-COVID-19 levels over the next 12 to 24 months could be challenging. This is given still-elevated inflation, tight monetary policies in developed countries, and continued supply-chain disruptions,” it said.