Dagong Upgrades the Sovereign Credit Rating of the Republic of the Philippines
Dagong Global Credit Rating Co., Ltd.
October 30, 2017
Dagong Global Credit Rating Co., Ltd. (hereinafter referred to as “Dagong”) has decided to upgrade the local and foreign currency sovereign credit ratings of the Republic of the Philippines (hereinafter referred to as “Philippines”) from BB- to BB, each with a stable outlook. Thanks to the rapid growth of domestic demand and the promotion of infrastructure construction, the Philippine economy will maintain medium-high growth. This growth, combined with the government's relatively low debt burden, comparatively low financing needs, and sufficient international reserves, will all serve to bolster the government’s solvency.
The key reasons for upgrading the sovereign credit ratings of the Philippines are as follows:
1. The repayment environment remains stable. The domestic political situation remains stable. The centre-left politician, Rodrigo Duterte, winning the presidential election was conducive to a continuity of policy, although the persistence of family power for a long time will affect the implementation of some policies. The financial system of the Philippines is generally sound, however there exist risks of rising non-performing loans in the real estate industry.
2. Strongly boosted by consumption and investment, the Philippine economy will maintain medium-high growth. Benefiting from a favorable employment situation and infrastructure construction, the Philippines’ economic growth rate increased to 6.9% in 2016. In the short term, investment and consumption is expected to remain rapid growth as the government continues to invest in infrastructure projects and human capital, adopting policies to attract foreign investment. It is projected that the Philippine economy will register a growth rate of 6.8% and 6.9% in 2017-2018. In the medium term, the release of demographic dividend and the completion of the infrastructure projects will provide an important impetus for economic development. The Philippine economy is expected to average around 7% throughout 2019-2021.
3. The financial deficit rose slightly, although low government financing needs and stable external support render the risk of debt repayment sources controllable. The fiscal deficit rate increased by 1.5 percentage points to 2.4% in 2016 as capital expenditure increased rapidly with the advancement of the infrastructure projects. In the short term, the implementation of tax reform will help to improve fiscal revenues, although it is difficult to offset the increases in fiscal expenditure caused by infrastructure projects, leading to a fiscal deficit of 3%. Despite some pressure on government finances, the financing needs of the Philippines general government are very low, and the ratio of financing needs to GDP is 4.4% and 4.3% in 2017 and 2018. Meanwhile, the Philippines general government is able to receive overseas aid amounting to as much as around 8% of GDP every year. Therefore, the risk among debt repayment sources for the Philippines government caused by financial deterioration is generally controllable.
4. The solvency of the Philippines’ government has improved. Thanks to a rapid growth of the economy, the debt burden of the Philippine general government has entered a downward channel. It is expected that the Philippine general government debt burden will drop to 33.1% and 31.7% in 2017 and 2018. A continuing decline in the debt burden will help bolster its solvency in local currency. The external debt of the Philippines can be well covered by sufficient international reserves. As of the end of 2016, international reserves of the Philippines were 26.5% of GDP, which can cover 555.6% of short-term external debt and 107.5% of total external debt; meanwhile the total external financing needs of the Philippines are also very low, only 4.9% of GDP. Therefore, solvency in foreign currency of the Philippine government has improved.
In the short term, the Philippine debt repayment environment is generally stable, while medium-high economic growth helps improve debt repayment sources and reduce the debt burden. In the meantime, the government’s financing needs are low, while international reserves are relatively sufficient, guaranteeing the stability of solvency in local and foreign currency. Therefore, the local and foreign currency sovereign credit rating outlook of the Philippines in the next 1-2 years is stable.