S&P retains RP credit rating, sees 3.7% GDP growth

MANILA, Philippines - International credit rating firm Standard & Poor’s has retained its stable outlook and BB- rating for the Philippines, citing the country’s strong external liquidity position and its track record of resilient economic growth.

In a report, S&P analyst Agost Benard said the ratings could be raised “on evidence of renewed focus and commitment to fiscal consolidation, and revenue improvement once the exigencies created by the global slowdown dissipate, and that the new administration continues with such efforts.”

By contrast, he said the ratings could be lowered if the current deterioration in revenue and fiscal balance outcomes appears persistent.

He added that the country’s weaknesses also include high public sector debt brought about by a narrow tax base as well as its excessive exposure to foreign-currency-denominated public debt and consequent vulnerability to adverse exchange-rate changes.

On top of the stable rating outlook, S&P said it expects domestic output - as measured by the gross domestic product (GDP) – would expand 3.7 percent this year from one percent last year after the country survived the worldwide economic meltdown.

“With progressive recovery in external demand during 2010 and an accommodative monetary policy, we expect GDP growth to rise to 3.7 percent this year from an estimated 1.0 percent in 2009,” Benard said.

 The GDP forecast of the credit rater is more optimistic than the GDP growth target of 2.6 percent to 3.6 percent set by economic managers through the Development Budget Coordination Committee (DBCC).

 “Notwithstanding sharply slower growth and the concomitant decline in fiscal revenues, the Philippines has withstood the economic and financial maelstrom of 2009 without deterioration in its credit fundamentals,” he added.

 Benard said the country’s resilient domestic consumption helped prevent the economy from contracting.

 “While overall economic growth was badly affected by the precipitous decline in external demand, domestic consumption proved mostly resilient, preventing the economy from slipping into recession,” the analyst added.

The National Statistical Coordination Board earlier reported that the country’s GDP slipped to 0.9 percent in 2009 from 3.8 percent in 2008 due to the full impact of the global economic meltdown. The GDP expansion was within the target of 0.8 percent to 1.8 percent set by the government.

 Benard pointed out that overseas Filipino workers’ (OFW) remittances helped prop up domestic consumption last year.

 “Remittances, which played a key role in propping up domestic consumption, rose 4.5 percent year on year in the first 10 months, in line with our expectation of slower growth rather than a decline in absolute terms,” he said.

According to him, the economic slowdown last year affected the collections of the Bureau of Internal Revenue (BIR) and the Bureau of Customs (BOC) resulting to a record deficit of about 3.7 percent of GDP last year.

 “The economic slowdown, however, significantly hurt revenue, adding to existing structural and administrative weaknesses. In January to November 2009, total revenues fell 5.5 percent from the same period the year before, while the revenue effort expressed as total-revenue-to-GDP ratio declined to 15.4 percent, from 16.5 percent, suggesting weaker collection efficiency,” he said.

 S&P said the scheduled presidential, national, and local elections on May 10 would be crucial as there is a need for the new administration to lay down a new fiscal consolidation plan after the earlier plan mapped out by the administration of President Arroyo was derailed by the global financial crisis.

 “The presidential elections this year will be crucial, as the incoming administration will be responsible for advancing fiscal reforms and generating domestic and foreign investment growth to lessen reliance on private consumption. S&P expects no major policy changes and little risk of volatility as long as democratic processes are followed, and election results and the winning candidate are free from controversy,” Benard said.