Tokyo agency affirms RP's stable outlook

MANILA, Philippines - Tokyo-based Rating and Investment Information Inc. (R&I) affirmed its stable credit rating outlook on the Philippines but stressed the need for the National Government to put its fiscal house in order and at the same time undertake needed infrastructure projects to sustain the strong economic rebound.

In a statement, R&I said it has affirmed its BBB-rating as foreign currency issuer for the Philippines with stable outlook after the country posted a 1.1-percent gross domestic product (GDP) growth while its neighboring countries fell into negative growth path last year.

The Japanese credit rater pointed out that more than 10 percent of the country’s GDP came from remittances from overseas Filipino workers (OFWs) that increased by 5.6 percent to $17.348 billion in 2009 from $16.426 billion in 2008 despite the full impact of the global financial crisis.

“The Philippine economy is relatively solid, with growth – supported by private consumption – positive even in 2009 when the effects of the global financial crisis were being felt. The country, however, has been slow in establishing a production base, and this has caused the country’s economic growth to pale in comparison to other ASEAN members,” the rating agency said.

According to R&I, the country’s per capita GDP in 2009 stood at only approximately $1,800.

The Philippines barely escaped recession last year after posting a GDP growth of 1.1 percent or lower than the GDP growth of 3.8 percent booked in 2008 as the administration of President Arroyo implemented a P330-billion Economic Resiliency Plan to cushion the impact of the global economic meltdown.

The stimulus package, the credit rater said, resulted in the expansion of the country’s budget deficit that swelled to a record P298.5 billion or 3.9 percent of GDP last year from P68.4 billion or 1.1 percent of GDP in 2008. This eclipsed the previous all-time high of P210.7 billion or 5.3 percent of GDP booked in 2002.

The new government under President Aquino has committed to trim the deficit to two percent of GDP by 2013 from about 3.9 percent of GDP or a new record level of P325 billion this year.

“Going forward, R&I will keep a close eye on whether the Philippine government can improve fiscal health while protecting the investment budget, as well as the direction of challenging fiscal management,” the credit rater said.

The country’s GDP posted a stronger-than-expected growth of 7.9 percent in the first half of the year from 1.2 percent in the same period last year.The GDP expanded by 7.9 percent in the second quarter of the year from the revised 7.8 percent growth in the first quarter.

R&I said the country’s GDP is projected to grow between five percent and six percent this year as private spending did not decline last year on the back of strong OFW remittances.

“In order to support stronger sustainable growth, the Philippines must revitalize industry and raise the investment rate to create an economy propelled by two drivers, investment and consumption,” the rating agency added.

R&I said the Philippine economy has relied heavily on consumption helping it survived the sharp drop in external demand due to the worldwide economic meltdown.

“Though consumption is strong, infrastructure conditions are not necessarily adequate, and an industrial base has been slow in forming, particularly for manufacturing. Investment has been weak for this reason,” it added.

Data showed that gross fixed capital formation to nominal GDP has not grown above approximately 15 percent since 2005.

Steady efforts at fiscal management helped the Philippines trim the debt to GDP ratio to 57 percent of GDP in 2008 from 78 percent of GDP in 2004. The ratio slightly increased last year to 57.3 percent of GDP as the government booked a record budget deficit forcing it to borrow more from foreign and domestic creditors.

“Though the ratio of outstanding debt to GDP has improved from its peak by more than 20 percentage points, interest costs accounted for nearly 20 percent of total expenditures in 2009. Maintaining fiscal health over the medium- to long-term will remain important in order to ensure flexibility in spending,” R&I said.