Country risk: High time Fitch upped its game on the Philippines

By:
Jeremy Weltman
Published on:

Why is Fitch so reticent to upgrade the sovereign when country risk experts and other credit rating agencies say it is overdue?

Philippines PSE-R-600

Philippine Stock Exchange traders start the year celebrating, but will Fitch add to the revelry?

In December, Fitch finally announced the Philippines would receive another upgrade as long as the reforms begun by president Benigno Aquino continue under the next administration.

The elections are scheduled for May 9, and there is every indication his successor will do so, notably if frontrunner Grace Poe overcomes legal challenges blocking her candidacy. Others are also running on the reformist, anti-corruption ticket.

However, the borrower’s improving risk score trend should have already seen Fitch fall in line with Moody’s and Standard & Poor’s, both of which rate the sovereign one notch higher.

Why such confidence?

Since the Philippines was awarded investment-grade status by Fitch in March 2013 – the first rating agency to do so – its Euromoney country risk score has continued to rise. A higher score implies lower investor risk.

 

This is partly down to simple economics.

Real GDP growth of 6% per annum is expected to persist, according to the IMF’s World Economic Outlook, supported by domestic demand.

There are risks, of course, to exports and capital inflows, with  the US tightening and China mired in a financial panic enduring an industrial slowdown, but the Philippines is perhaps the least exposed, still expanding faster than most of its contemporaries.

They include not only Malaysia and Indonesia but also Thailand, which is one place below in Euromoney’s global rankings and yet is ranked BBB+ by all three agencies.

Whereas Turkey and South Africa are slipping in Euromoney’s global rankings, the Philippines held its position last year and is eight places higher compared with its ranking in 2010. Preliminary results from the survey – to be released next week – suggest the borrower stood its ground at the end of 2015.

Devil is in the detail

The Philippines’ risk factor scores highlight its comparative strengths.

Whereas  bank stability and the employment/unemployment situation are more favourable in Thailand, the Philippines chalks up higher scores for its economic-GNP outlook, monetary policy/currency stability and government finances. It also has a far superior score for capital access.

Fitch readily admits its global competitiveness ranking is comparable to BBB rated sovereigns, and its corruption, transparency and economic freedom indicators have all improved.

Euromoney’s survey moreover shows an improvement in the scores for capital repatriation and institutional risks.

"In terms of public and external finances, the Philippines is relatively well-placed to weather the current EM turmoil relatively smoothly," says Arjen van Dijkhuizen, senior economist at ABN Amro.

"The budget deficit is relatively small and the public debt ratio at manageable levels. The country also runs structural current-account surpluses, external debt is low, and FX reserves comfortably cover both external debt and almost 10 months of imports."

Such highly favourable external risk indicators provide the Philippines with a strong cushion to withstand global financial stresses and are a sure sign of its creditworthiness.

It can only be a matter of time before Fitch makes good on its pledge and falls in line.

This article was originally published by ECR. To find out more, register for a free trial at Euromoney Country Risk