Fitch Affirms the Philippines at 'BBB-'; Outlook Positive

 Fitch Ratings has affirmed the Philippines' Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at 'BBB-' and 'BBB' respectively, and the Outlook remains Positive. The issue ratings on the Philippines's senior unsecured foreign- and local-currency bonds are also affirmed at 'BBB-' and 'BBB' respectively. The Country Ceiling is affirmed at 'BBB' and the Short-Term Foreign-Currency IDR at 'F3'.

KEY RATING DRIVERS

The affirmation of Philippines'sovereign ratings reflects the following factors:

• External finances are a rating strength. The Philippines has been running current-account surpluses since 2003, with an average of around 3% of GDP for the period 2011-2015. This has been helped by the steady remittance inflow and has led to a build-up in foreign exchange reserves. The country's net external creditor position at nearly 14% of GDP compares to the median net debtor position of 4.6% of GDP among peers in the 'BBB' rating category.
   
• Government debt and deficit levels have been declining and by the end of 2015, general government debt to GDP is estimated at about 36% of GDP compared with 43% of GDP at the end of 2010. Fiscal deficits have narrowed to just 0.9% of GDP in 2015 from 3.5% of GDP in 2010. Fitch estimates that the fiscal deficit would remain under 2% of GDP over 2016-2017. However, the agency continues to view low government revenues, which reduces the sovereign's ability to contain fiscal balances in the event of a shock, as a weakness in the Philippines' fiscal profile. Fitch estimates general government revenue was close to 20% of GDP in 2015, which is lower than the 'BBB' median's 28.6% and 'A' median's 34.7%.
   
• The Philippines' low average income and level of development is a credit weakness. The Philippines' GDP per capita in 2015 was USD2,860, which is lower than the 'BBB' median of USD9,253. This measure however does not capture the significant support to living standards provided by overseas Filipino remittances. In 2014, the country fell in the 37th percentile on UN's Human Development Index, compared with the 63rd percentile for the 'BBB' median.
   
• Governance standards have continued to strengthen since 2010 under the current administration of President Benigno Aquino III, especially government effectiveness and political stability as measured by World Bank's governance metrics. Presidential elections on 9 May 2016 will see a change of administration as Mr. Aquino is constitutionally barred from seeking re-election. It remains to be seen whether the next administration will preserve or extend the improvements in this area seen under Mr. Aquino's stewardship.
   
• Macroeconomic growth performance remains favourable. Average real GDP growth in 2011-2015 was 5.9%, which is far above the 'BBB' median of 3.3% and the 'A' median of 3.2%. Fitch expects the Philippines' growth momentum to continue and expects real GDP growth to average around 6% over 2016-17.
   
• Liquidity levels in the Philippines' banking sector are ample, capitalisation is strong and loan-loss reserves have risen. The banking sector has already implemented Basel III minimum capital standards in full at the beginning of 2014. Loan growth slowed to nearly 14% in 2015 from close to 19% in 2014. Active supervision and regulation by a risk-aware central bank, which has progressively strengthened risk management requirements for the banks over the years, have helped to temper the risks from high credit growth.

RATING SENSITIVITIES

The main factors that individually or collectively might lead to positive rating action are:

• Further evidence that improvement in governance standards can be sustained following a change in government after elections.
• Further broadening of the government's revenue base that lends greater stability to government finances.
• Continued strong growth without the emergence of imbalances.

The rating Outlooks are Positive. Hence Fitch does not anticipate a material probability of negative action over the forecast period. However, the main factors that could see the ratings revert to Stable Outlook are:

• Deterioration in governance standards and/or reversal in reforms implemented under the Aquino administration could be credit negative.
• Instability in the financial system, possibly triggered by a sustained period of excessive credit growth could be credit negative

KEY ASSUMPTIONS

• Global economic conditions develop in line with Fitch's latest Global Economic Outlook.