PHL keeps investment grade from Japan

A JAPAN-BASED debt watcher has affirmed its credit rating for the Philippines, citing in a statement yesterday the country's continued macroeconomic strength through a change in presidents and resilience against external headwinds.

The Japan Credit Rating Agency, Ltd. (JCR) has affirmed its "BBB+" rating with a "stable" outlook for the Philippines, noting policy continuity under President Rodrigo R. Duterte, who took office on June 30, and backed by strong fundamentals to fuel the economy to grow at a rate "higher than 6%" this year compared to 2015's 5.9%.

"The ratings mainly reflect the country's certain resilience to external shocks, relatively sound fiscal position and relatively high economic growth potential underpinned by robust domestic demand," the Tokyo-based credit rater said in its statement.

The country's foreign and local currency long-term issuer rating was pegged at "BBB+", or two notches above minimum investment grade status.

A "stable" outlook denotes a good balance of risks that would enable the country to keep its investment grade within the next 12 to 18 months.

An investment grade status reflects an economy's ability to pay its maturing dues, hence, bringing down the cost of borrowing.

JCR cited a "relatively sound" fiscal position given a lower-than-programmed budget shortfall, along with a continued current account surplus due to steady fund inflows which provide ample buffers against heightened risks in the global financial market. The agency specifically cited the country's fiscal deficit equivalent to 0.9% of gross domestic product (GDP), a declining share of total debt and a bias towards local borrowing.

A healthy banking sector also contributed to the maintained ratings, the agency said, citing a lower share of soured loans and banks remain sufficient capital buffers that gave enough room to increase lending.

At the same time, the statement quoted credit analysts Yoshihiko Tamura and Makoto Ikushima as noting that "the benchmark ratio of bank lending to GDP still stayed lower than 50% at the end of 2015 at 49.1%."

"This indicates that a further deepening and diversification of the financial sector remains an important challenge for the country to achieve sustainable economic growth."

The country's leadership succession in June was also positive for the economy, JCR added, citing signals of sustained economic policies, although it remains to be seen how these thrusts will be implemented.

"The Duterte administration, which took office in June 2016, has pledged to continue the Aquino administration's macroeconomic policies to ramp up public infrastructure investment, attract more foreign direct investment through easing of regulations, and enforce tax reforms with focus on reduction of individual and corporate income tax rates, among others," the statement read.

"JCR will watch how the Duterte administration will evolve its economic policies."

At the same time, the credit rater flagged the pressing need for the Philippines to catch up on infrastructure as well as reforms to improve the local business climate, saying that plans to trim income tax rates may hinder efforts to ramp up public spending.

"Given its planned individual and corporate income tax rate cuts and increased infrastructure spending, the government needs to strengthen the tax base and ensure sustained economic growth in order to maintain its relatively sound fiscal position," the agency said.

In a separate statement, Finance Secretary Carlos G. Dominguez III said the maintained credit ratings showed that the Duterte government pursued the right track in keeping the status quo on the economic front.

"JCR's decision to keep the Philippines' BBB+ rating is a vote of confidence in the Duterte administration's resolve to sustain and strengthen the macroeconomic fundamentals that have transformed the Philippines into Asia's newest bright spot," Mr. Dominguez was quoted as saying.

"This serves as impetus for the new government to pursue its 10-point socioeconomic agenda that is meant not only to keep the domestic economy on its upward trajectory but also to make it inclusive for all Filipinos."

Mr. Dominguez and other economic managers are drafting a comprehensive tax reform package that would cut income taxes and offset expected foregone revenues with revenue-generating measures, while also seeking to boost spending by pouring more funds to develop infrastructure and improve basic services. The government expects this year's fiscal gap to hit an equivalent of 2.7% of GDP, before rising to 3% annually from 2017 until 2022.

Bangko Sentral ng Pilipinas Deputy Governor Diwa C. Guinigundo, for his part, said in a separate statement that the country's sound fundamentals would help usher in a "more inclusive" economy.

Apart from JCR, the Philippines also holds investment grade status with Moody's Investor's Service ("Baa2" with a stable outlook), S&P Global Ratings ("BBB," stable), Fitch Ratings ("BBB-," positive), and the South Korea-based National Information and Credit Evaluation ("BBB," stable).

Source: Business World Online