Fitch keeps Philippine credit ratings unchanged

London-based credit watchdog Fitch Ratings has decided to keep its credit ratings and “stable” outlook for the Philippines, but warned that the sharp rise in consumer prices here and in other emerging market economies has created downward pressures on their credit standings.

The Philippine credit ratings from Fitch still stand at “BB” for its long-term foreign currency debt, “BB+” for its long-term local currency debt, “B” for its short-term foreign currency debt, and the country ceiling at “BB+”. These ratings are all below investment grade.

A “stable” outlook means the country’s credit ratings are not at risk of being downgraded in the short term, but neither are they likely to be upgraded.

“Ongoing current account surpluses, driven largely by overseas workers’ remittances, are contributing to a steady reduction in the country’s external debt ratios, and have allowed for a significant increase in official foreign exchange reserves,” said Franklin Poon, director of Fitch’s sovereign group.

Fitch, which currently has the highest credit rating on the Philippine government among the three major global credit watchdogs—New York-based Standard & Poor’s and Moody’s Investor Service are the others—also projected a slowdown in economic growth this year to 5.3 percent from 7.2 percent last year.

It said the Philippine government’s fiscal condition was still considered relatively weak, adding that measures were needed to boost internal revenue collection. Although year-on-year tax collection of the government has been increasing, Fitch said it still did not match the growth in expenditure requirements.

The credit-rating firm projected that the Philippines would post a national budget deficit this year equivalent to 2.1 percent of gross domestic product (GDP), or about P157.5 billion. The forecast is much higher than the government’s goal of limiting the deficit this year to 1.0 percent of GDP, or P75 billion.

“It is critical that the various measures to enhance revenue collection begin to deliver more meaningful results, as spending pressures, which have been carefully managed in recent years, mount,” Fitch said. Economic challenges, especially higher cost of food and oil, have forced the government to spend more on social services to help the poor cope.

The Philippine government was able to trim its debts from 63 percent of GDP in 2005 to only 49 percent in 2007, but Fitch said the latest debt-to-GDP ratio was still higher than the average of 34 percent for countries with the same credit ratings.

Record-high inflation rates have caused a slowdown in the economic growth of many countries, and the decelerated rise in output, in turn, forces governments to spend more for pump-priming.

“It is the surge in inflation, rather than the direct consequences of the global credit crunch, that is the principal threat to macroeconomic and financial stability in many emerging markets,” said David Riley, group managing director in Fitch’s sovereigns team.

Fitch said faster inflation dragged down a country’s credit-worthiness because it encouraged investors to transfer their investments to perceivably more stable economies. Capital flight, if not offset by other sources of foreign exchange, depletes a country’s dollar reserves that are supposed to help it pay off obligations denominated in foreign currencies.

“Rising fuel and food prices are also placing government budgets under pressure as subsidies become more expensive,” Riley said.

The Philippine government has decided to abandon the goal of balancing its budget this year and to increase public spending to compensate for drag-down effects of inflation on overall growth.

The central bank, Bangko Sentral ng Pilipinas (BSP), recently raised its key policy rates to 5.25 and 7.25 percent for overnight borrowing and lending, respectively, to prevent a further rise in year-on-year inflation, which reached 9.6 percent in May, the fastest in nine years.

The latest inflation rate has led the BSP to admit that the official target of limiting average inflation within 3.0-5.0ercent is no longer attainable. The BSP expects inflation to average 7.0-9.0 percent this year.

“With consumer price inflation in several emerging market economies now significantly above official targets and accommodated by wage increases, including hikes in public-sector salaries, the risk of a wage-price spiral as inflation expectations shift upwards is increasing,” Riley said.

The accelerated rise in overall prices of goods and services was blamed on tightening supply of oil and rice in the world market, as well as increasing global demand led by the growing economies of China and India.

Fitch said central banks in the Philippines and other emerging market economies were faced with the dilemma of balancing the need to curb rising inflation and boost the slowing growth of their economies. While raising interest rates could help temper inflation, such a move has an ill-effect of dragging down growth.

“The risk faced by several central banks is that the failure to contain inflationary pressures will result in downward pressure on exchange rates—especially if the Fed surprises with earlier rises in US interest rates—leaving policymakers with the unenviable choice of either allowing currencies to depreciate, which in turn will stoke inflation further, or intervening in support of their currencies and raising interest rates much more aggressively with negative consequences for growth,” Riley said.

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Fitch keeps Philippine credit ratings unchanged