Korean debt watcher keeps PH’s ‘BBB’ rating, citing economy’s resilience to shocks, prudent fiscal policy

NICE projected that the Philippine economy will grow by 6.3 percent this year.

Korea-based NICE Investors Service maintained the Philippines’ investment grade rating of “BBB,” recognizing the country’s ability to weather external headwinds and the government’s prudent tax and spending policies.

The existing rating, a notch above the minimum investment grade, is assigned a “stable” outlook, given perceived absence of factors that can materially affect the country’s creditworthiness over the short term.

“The policy direction of the Duterte administration [that is] set to increase government expenditure through expanding [the] tax base is deemed appropriate, given the need for infrastructure investment. The government’s tax reform and infrastructure investment acceleration are already showing tangible effects in 2018,” NICE said in its latest report on the Philippines released October 31.

Noting the volatility in the foreign exchange market globally as a result of the US-China trade war and interest rate hikes in advanced economies, NICE said the impact will be appropriately managed, “given the country’s response capability in terms of FX liquidity.”

Responding to the latest credit rating development, Finance Secretary Carlos G. Dominguez III said: “A decisive leadership that implements game-changing reforms in policymaking, tax administration, and infrastructure modernization in pursuit of high and inclusive growth, characterizes the Duterte Administration. The Government’s Comprehensive Tax Reform Program (CTRP) and the “Build, Build, Build” infrastructure initiative are expected to sustain the country’s growth momentum, achieve financial inclusion, and propel the Philippines into an upper-middle income economy by 2022. We thank NICE Investors Service for recognizing the scope and purpose of the Duterte Administration’s policy directives.”

On a similar note, BSP Governor Nestor A. Espenilla, Jr. said: “As observed by independent third-parties from the international community, such as NICE Investors Service, the Philippine economy has sufficient buffers against external shocks. With gross international reserves equivalent to about seven months of imports, a steady source of FX inflows led by remittances, BPO revenues, and tourism receipts, a flexible exchange rate policy, and overall prudent management of the country’s external accounts, the economy shall remain resilient amid global volatilities. Moreover, the BSP constantly monitors external and domestic developments, and stands ready to implement appropriate policy actions consistent with its price and financial stability mandates.”

The first package of the Duterte administration’s tax reform — the Tax Reform for Acceleration and Inclusion (TRAIN) — took effect in January this year, generating net revenues for the government, helping fund the “Build, Build, Build” initiative. Among other provisions, the law slashed individual income tax rates, and adjusted excise taxes on oil, automobile sales, and sugary drinks.

Succeeding tax reform packages are pending in Congress. Tax reform helps government address the infrastructure gap without compromising fiscal health.

NICE projected that the Philippine economy will grow by 6.3 percent this year. It noted that while such marks a slowdown from last year’s 6.7 percent, the Philippines will still remain as one of the fastest growing economies in the region.

NICE also said elevated inflation this year is not expected to undermine the country’s short-term macroeconomic stability, especially with the BSP’s exhibited commitment to price stability.

Inflation accelerated this year largely on account of supply-side factors and is not expected to be persistent.

The BSP had raised policy rates by a total of 150 basis points from May to September, a move expected to rein in inflation expectations and address second round effects. With such policy actions, based on latest estimates by the BSP, inflation is anticipated to settle back to within-target range of 2.0 to 4.0 percent by next year.

The BSP likewise reactivated the Currency Rate Risk Protection Program (CRPP) through which universal/commercial banks offer a hedging facility for parties with foreign currency-denominated borrowings. Such facility will temper pressures on the peso, amid global events adversely impacting emerging markets.