File photo of Philippines President Rodrigo Duterte. Image used for representational purposes.

Philippines Wins Fitch Upgrade in Boost for Duterte's Plans

(Bloomberg) -- Fitch Ratings raised the Philippines’ sovereign rating by one level, providing an endorsement of President Rodrigo Duterte’s economic plans, which include a tax reform aimed at strengthening the fiscal outlook.

The rating on the nation’s long-term foreign currency-denominated debt was raised to BBB with a stable outlook, Fitch said in a statement on Monday. The upgrade puts the Philippines on par with Italy and ahead of Indonesia.

Despite the controversy over Duterte’s bloody anti-drug war, Fitch said there’s no evidence it’s undermined investor confidence. The economy is set to remain one of the fastest expanding in Asia with growth of 6.8 percent next year and in 2019, the ratings company said.

Philippines Wins Fitch Upgrade in Boost for Duterte's Plans

“Strong and consistent macroeconomic performance has continued, underpinned by sound policies that are supporting high and sustainable growth rates,” Fitch said. “Investor sentiment has also remained strong, which is evident from solid domestic demand and inflows of foreign direct investment.”

The peso rose 0.3 percent to 50.35 per dollar as of 11:50 a.m. in Manila. The benchmark stock index dropped 0.2 percent.

Tax Reform

Lawmakers are meeting on Monday to debate the tax bill, which include cutting most income taxes while raising levies on fuel, sugar and car purchases. 

“We are quite confident it’ll push through, but we expect delays,” Mohamed Faiz Nagutha, an economist at Bank of America Merrill Lynch, told reporters in Singapore on Monday. “We do think the tax reforms have, at the principle level, broad consensus.”

The president’s tax plan will boost revenue, which has been a long-standing weakness in the nation’s fiscal profile, Fitch said. That will help spur infrastructure spending and underpin economic expansion.

The move by Fitch was “a significant vote of confidence,” Budget Secretary Benjamin Diokno said in a mobile-phone text message, while Finance Secretary Carlos Dominguez said there’s likely to be more credit-rating upgrades in years to come as the government reforms the tax system, improves infrastructure and attracts more investment.

“Our fiscal position is much stronger now on account of administrative measures we are implementing to improve revenue collection,” Dominguez said in a text message. “Our growth prospects are also brighter compared with our neighbors and peers.”

Overheating Risk

The economy’s strong growth raises the risk of overheating, Fitch said, citing a widening trade deficit and rising leverage.

“Strong credit growth raises the risk of credit misallocation and asset bubbles, but we believe that the authorities are aware of such risks and prepared to act to curb excessive risk-taking,” Fitch said.

Click to read: Espenilla Likens Philippines to Race Car, Hot But No Overheating

Other details from the Fitch statement:

  • Gross general government debt is projected by Fitch to decline to around 34 percent of gross domestic product at the end of 2017, below the ‘BBB’ median of 41.1 percent of GDP
  • A full set of tax reform packages would boost revenue by 2 percent of GDP by 2019, with administrative measures to add another 1 percent over this period, Fitch said, citing a government estimate.
  • The recent appointment of central bank Governor Nestor Espenilla from within the Bangko Sentral ng Pilipinas has provided continuity and supports monetary policy credibility
  • Inflation is expected to remain within the BSP’s target range of 2 percent to 4 percent
  • The current account will probably shift into a deficit in 2017, and Fitch predicts this trend to continue in 2018 and 2019
  • GDP per capita estimated at $3,018 at the end of 2017, which is low compared to the median of $11,173 in countries rated BBB. Indicators for governance and ease of doing business are also weak

©2017 Bloomberg L.P.