PH at risk from structural weaknesses, political row

STRUCTURAL weaknesses and political volatility could pressure the Philippines’ economic and fiscal performance, Fitch Ratings said on Wednesday.

The country’s credit rating — an investment-grade “BBB” with a stable outlook — is being constrained by low GDP per capita, it also said in a report.

“Governance standards are weaker than at peers,” the debt watcher noted, but added that World Bank indicators “somewhat overstate this.”

Gross domestic product growth has slowed from a post-Covid pandemic rebound, it said, and will likely expand by 5.7 percent this year — up from 2023’s 5.5 percent but below the government’s 6.0- to 6.5-percent target.

Domestic demand will drive 2024 growth, Fitch said, and this will likely improve to 6.2 percent next year due to interest rate cuts, spending on infrastructure, and trade and investment reforms.

This outlook falls within the government’s 6.0- to 8.0-percent goal for 2025 to 2028.

Fitch said the Philippines’ rating reflected “strong medium-term growth” that would support the size of the economy — said to be large in relation to its “BBB” peers — and a gradual reduction in the debt-to-GDP ratio.

The latter is expected to fall from next year due to strong growth and lower fiscal deficits. The central government deficit was forecast to hit 5.7 percent of GDP this year and hit 4.9 percent in 2026 after averaging 5.1 percent as of end-September.

While higher than the government’s target, these still are an improvement from 6.2 percent in 2023 and the 8.6-percent peak hit in 2021.

“Our narrower general government deficit forecast of 4.4 percent of GDP for 2024 reflects social security and local government surpluses,” Fitch added.

It warned, however, that escalating political conflicts ahead of next year’s midterm elections “could, if sustained, weigh on macroeconomic and fiscal performance.”

Fitch noted that the support of Vice President Sara Duterte and her father, former president Rodrigo Duterte, was instrumental in President Ferdinand Marcos Jr.’s landslide win in 2022.

Both campaigned on a unity platform that clearly cracked this year with Sara — under investigation for misuse of public funds — threatening to have Marcos killed.

Externally, policies to be implemented by incoming US President Donald Trump pose risks for the Philippines along with other economies.

A further strengthening of the dollar from US trade protectionism could put further pressure on the peso, which has fallen nearly 5 percent as of October, and inflation.

“The Philippines would [also] be vulnerable to a change in US immigration policy, given the importance of remittances for domestic consumption,” Fitch said.

Monetary policy, however, is a bright spot, and Fitch said that the Bangko Sentral ng Pilipinas had made strides in managing inflation, which at 3.2 percent as of end-November was down from 6.0 percent a year ago and within the 2.0 to 4.0 percent target.

“We forecast inflation to stay around these levels in 2025-2026, leading to a further 100 bps (basis points) of rate cuts in 2025,” it said.

“A credible inflation-targeting framework and flexible exchange rate regime contribute to a sound economic policy framework and support the country’s rating,” Fitch said.