Ratings upgrade possible as S&P raises PH outlook

S&P Global Ratings affirmed the Philippines’ investment grade rating on Tuesday and raised its outlook to “positive” from “stable” to reflect the economy’s strong growth potential amid improved institutional strength on the back of “effective policy making.”

The debt watcher on Tuesday affirmed its “BBB+” long-term credit rating for the country, which is a notch below the “A” level grade targeted by the government. It also kept its “A-2” short-term rating for the Philippines.

Still, S&P Global raised its rating outlook to “positive” from “stable.” A positive outlook means the Philippines’ credit rating could be raised over the next two years if improvements are sustained.

“Our improved institutional assessment drives our positive outlook on the Philippines. We believe the strengthening of the country’s institutional settings, which had contributed to a significant enhancement in the sovereign’s credit metrics over the past decade, will continue,” S&P Global said in a statement. “This is demonstrated by the strong economic recovery in the last two years, and ongoing reforms to support business and investing conditions.”

“This improvement could lead to stronger sovereign support over the next 12-24 months if the Philippines’ economy maintains its external strength, healthy growth rates, and that fiscal performance will strengthen.”

Bangko Sentral ng Pilipinas (BSP) Governor Eli M. Remolona, Jr. said the debt watcher’s upgraded outlook “reflects the work the government has done to improve the economic, fiscal, and monetary environment, enabling strong growth to continue.”

Finance Secretary Ralph G. Recto likewise said this “reaffirms our stable economic and political environment and that we are on track to achieve a growth-enhancing fiscal consolidation.”

“We have a comprehensive ‘Road to A’ initiative to ensure that we secure more upgrades soon,” he added.

S&P Global said the Philippines’ sovereign rating reflects the economy’s “above-average growth potential.”

“This strength underpins constructive development outcomes. The ratings also benefit from the country’s strong external position,” it added.

For the first nine months of the year, the Philippine economy expanded by 5.8%, slightly below the government’s goal of 6-7% gross domestic product (GDP) growth this year.

The government is targeting 6.5-7.5% GDP growth next year and 6.5-8% growth from 2026 to 2028.

S&P Global expects Philippine GDP growth to average 5.5% this year, driven by exports and easing inflationary pressures.

“Ongoing reform on the business, investment, and tax fronts should benefit growth over the next three to four years.”

The Philippine economy will likely grow at an average of 6.2% a year over the next three years, it added.

“Solid household and corporate balance sheets, and sizable remittance inflows underpin the Philippine economy’s positive medium-term trajectory,” S&P Global said.

“Ongoing efforts to address infrastructure gaps, and improvements in the business climate through regulatory and tax reforms should also support growth in economic productivity.”

FISCAL REFORMS

The government’s fiscal reforms have also boosted the economic outlook, the credit rater said.

“We believe that effective policy making in the Philippines has delivered structural improvements to the country’s credit metrics. Fiscal reforms have raised government revenue as a share of GDP and helped to fund public investment. Improved infrastructure and policy environment have helped to keep economic growth strong in much of the past decade,” it said.

“The government’s fiscal and debt settings had 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 thinned, but consolidation has begun with the economic recovery well on track.

The Philippines’ low GDP per capita relative to other investment-grade sovereigns temper these strengths,” it added.

Latest data from the Treasury showed that the budget deficit narrowed by 1.35% to P970.2 billion in the first nine months.

The government is seeking to bring the deficit-to-GDP ratio to 5.6% this year and further down to 3.7% by 2028.

“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 relatively low general government indebtedness testify to this,” S&P Global said.

However, the credit rater said restoring fiscal and debt settings to pre-pandemic levels will be challenging and likely be a gradual process.

“The ongoing economic recovery in the Philippines should facilitate a reduction in the general government deficit and a further stabilization of the debt burden,” it said. “It will, however, take several years for fiscal balances to recover to pre-pandemic levels given the eroded fiscal headroom.”

S&P Global added that it expects the country’s net general government debt to gradually decline amid continued fiscal consolidation.

Moving forward, the debt watcher said it could upgrade the Philippines’ credit rating if the current account deficit and fiscal position remain well-managed.

“We may raise the ratings if our expectations of current account deficits tapering over the forecast period are realized such that buffers in the Philippines’ narrow net external asset position are maintained and if the government achieves more rapid fiscal consolidation,” it said.

S&P Global expects the country’s current account deficit to persist but at “modest levels.”

The BSP estimates the current account deficit to reach $6.8 billion this year, equivalent to 1.5% of GDP. In the first half of the year, the country’s current account deficit stood at $7.1 billion, accounting for 3.2% of economic output.

On the other hand, the rating outlook could be revised down to “stable” if economic recovery slows down or if the government’s fiscal and debt positions deteriorate.

“If persistently large current account deficits lead to a structural weakening of the Philippines’ external balance sheet, we would also revise the outlook to stable,” S&P Global added.

Source: Business World

Faster consumption key to PHL hitting 2024 growth target

Faster private consumption will be crucial for the Philippine economy to hit its growth target this year, S&P Global Ratings said.

S&P Global economist for Asia-Pacific Vishrut Rana said Philippine gross domestic product (GDP) is projected to expand by 5.8% this year.

“The key swing factor for the rest of the year is whether private consumption comes back online or whether it remains slightly weak and that will ultimately determine whether the economy can hit the 6% growth mark. For the moment, we have 5.8%. There’s some upside risk to that number,” he said in a webinar on Tuesday.

Philippine GDP expanded by 6.3% in the second quarter, bringing first-half growth to 6%.

To meet the lower end of the government’s 6-7% target, the economy must expand by at least an average of 6% in the second half of 2024.

Domestic demand is expected to support the growth outlook of the Philippines and the rest of Southeast Asia, S&P Global said.

“What we observe is the domestic demand in the region is holding up pretty well. Generally speaking, private consumption and investment are both doing relatively okay,” Mr. Rana said.

“This is particularly relevant given that we’ve seen tighter monetary policy over the past couple of years, and that has not slowed down domestic demand as much as feared earlier.”

However, Mr. Rana cited risks to this outlook, such as a global slowdown.

“In particular, if global growth turns out to be weaker than expected, then we could see a deterioration in Southeast Asia’s growth outlook driven by weakness in manufacturing and trade,” he said.

He noted that growth in the Philippines has been driven by the public sector.

“In the Philippines, what we observe is that it’s the public sector that’s holding up growth. We see public spending remaining very strong. Investment activity is strong. On the other hand, private consumption growth is slightly weaker,” he said.

Second-quarter GDP growth was primarily driven by gross capital formation, which expanded by 11.5%. Government spending also grew by 10.7%, a turnaround from its 7.1% contraction a year earlier.

On the other hand, household final consumption rose by 4.6% year on year in the second quarter, slowing from the 5.5% growth a year ago. Private consumption typically accounts for over 70% of the economy.

“Sectorally speaking, some of the service sectors continue to perform relatively well. We see some weakness in manufacturing, which is holding back the economy somewhat,” Mr. Rana added.

For 2025, S&P Global sees Philippine growth expanding by 6.1% due to an “improvement largely based on gradually recovering domestic demand and also a normalization of monetary policy going forward,” he said.

Meanwhile, S&P Global said that inflation is not a “major risk” at the moment for the Philippines and the rest of the region. 

“We did see an uptick in the latest inflation reading… so there was an acceleration, it was largely driven by food. However, if you look at core inflation, that is still under the 3% mark,” Mr. Rana said.

Headline inflation likely settled at 3.7% in August, according to the median estimate yielded from a poll of 15 analysts. If realized, this would be slower than the nine-month high of 4.4% in July and the 5.3% clip in the same month a year ago.

The BSP earlier said that the spike in July inflation was expected and only temporary, with inflation expected to return to within the 2-4% target band from August onwards.

“Accordingly, central banks in the region are also likely to be cutting interest rates. So we expect BSP to cut further. (The BSP is) likely to lower the interest rates, but also at the same time, not so sharply that the currency is affected,” Mr. Rana said.

BSP Governor Eli M. Remolona, Jr. earlier said that the central bank can cut rates by another 25 basis points (bps) in the fourth quarter. This after the Monetary Board delivered a 25-bp rate cut at its meeting last month, bringing the key rate to 6.25%.

Meanwhile, Mr. Rana said Southeast Asian currencies are expected to remain “relatively stable” for the rest of the year, “assuming no surprises to our Fed rate outlook.”

S&P expects the US Federal Reserve to deliver two rate cuts this year, one in September and another towards the end of the year.

“What we’ve seen over the last month is significant strength in global currencies, but particularly Southeast Asia currencies against the US dollar. We’ve seen appreciation in the range of between one and a half to 3% against the dollar or several currencies,” he said.

“The peso also appreciated over that time period. This is based on expectations of easing out of the US Fed. The pace of easing will determine the currency outlook as well,” he added.

The peso closed at P56.61 against the greenback on Tuesday, weakening by 23 centavos from its P56.38 finish on Monday. The local currency was previously trading at the P57-58 per dollar level in the past months.

The peso is expected to range from P56 to P58 this year, according to latest Development Budget Coordination Committee data.

Source: Business World

S&P Global trims PHL growth outlook

S&P Global ratings trimmed its gross domestic product (GDP) forecast for the Philippines for this year and 2025 amid expectations that high interest rates will continue to crimp domestic demand.

In a report, the credit rater cut its growth forecast for 2024 to 5.8% from 5.9% previously. It also lowered its GDP estimate for 2025 to 6.1% from 6.2% earlier.

S&P’s latest projections are below the government’s 6-7% growth goal for this year, and 6.5-7.5% for 2025.

“Domestic demand started out the year on a disappointing note, at least in part due to the high level of interest rates,” S&P Global Ratings Senior Economist Vincent Conti said.

In the first quarter, the Philippine economy grew by a weaker-than-expected 5.7%.

Household consumption, which accounts for about three-fourths of growth, grew by 4.6%. This was its slowest pace since the 4.8% drop in the first quarter of 2021.

“With the Fed staying higher for longer than initially expected, so will the Bangko Sentral ng Pilipinas (BSP),” Mr. Conti said.

US Federal Reserve officials are now projecting just one rate cut this year and delaying any policy easing moves to as late as December.

The Monetary Board has kept its key rate at a 17-year high of 6.5% since October 2023 to tame inflation.

BSP Governor Eli M. Remolona, Jr. had said that the earliest the central bank can begin cutting rates is by August for a total of 25-50 bps for the year.

S&P said it expects the benchmark rate to stand at 6.25% by end-2024, which implies a 25-bp cut this year.

“This (high interest rates) will continue to pose headwinds for a full recovery in domestic demand. Nonetheless, there are favorable base effects in exports that, combined with relatively slower imports due to domestic demand, will provide growth support in the interim,” Mr. Conti added.

Despite the cut, S&P Global still expects the Philippines to post the second-fastest growth in the Asia-Pacific  region this year, the same as Vietnam (5.8%) and just behind India (6.8%).

For 2025, the 6.1% growth projection for the Philippines would make it the third-fastest growing economy, after India (6.9%) and Vietnam (6.7%).

“Better export growth will lead to higher GDP growth this year in Malaysia, the Philippines, Singapore, South Korea, Taiwan, Thailand, and Vietnam. Other economies should also benefit from stronger exports this year,” it added.

Meanwhile, the debt watcher said that inflation is projected to average 3.4% this year. This would be slightly below the BSP’s 3.5% full-year forecast.

It sees inflation further easing to 3.1% in 2025, also below the BSP’s projection of 3.3% for next year.

“Inflation pressure has eased in the region. But the prospect of delayed US policy rate cuts is leading Asian central banks to do the same and take other measures to protect domestic currencies. Emerging markets could be tested if US rates were to rise further and capital outflows intensified,” S&P said.

Headline inflation picked up to 3.9% in May, marking the sixth straight month inflation settled within the BSP’s 2-4% target band.

Source: Business World