Fitch Ratings - Hong Kong-10 December 2017: Fitch Ratings has upgraded the Philippines' Long-Term Foreign-Currency Issuer Default Rating (IDR) to 'BBB' from 'BBB-'. The Outlook is Stable.
Strong and consistent macroeconomic performance has continued, underpinned by sound policies that are supporting high and sustainable growth rates. Investor sentiment has also remained strong, which is evident from solid domestic demand and inflows of foreign direct investment. As such, there is no evidence so far that incidents of violence associated with the administration's campaign against the illegal drug trade have undermined investor confidence. Over the medium term we expect higher infrastructure spending under the government's public investment programme to support continued robust growth. Fitch forecasts real GDP growth of 6.8% in 2018 and 2019, which would maintain the Philippines' place among the fastest-growing economies in the Asia-Pacific region.
The Philippines has also maintained fiscal policies geared towards a sustained decline in the gross general government debt (GGGD) ratio. GGGD is projected by Fitch to decline to around 34% of GDP at end-2017, below the 'BBB' median of 41.1% of GDP. The recent appointment of a new central bank governor from within the Bangko Sentral ng Pilipinas (BSP) has provided continuity and supports monetary policy credibility. We expect inflation to remain within the BSP's target range of 2%-4%. A continuation of exchange rate flexibility should help preserve the recent build-up of foreign exchange reserves.
Fitch expects the Philippines' fiscal profile to improve as a result of the government's tax reform initiative. The House of Representatives and Senate have passed their respective versions of the first component of a five-part comprehensive tax reform programme, which may be signed into law before the year's end. We estimate the bill to be net revenue positive, reflecting an expansion of the VAT base and higher taxes on petroleum products, automobiles and on sugar sweetened beverages, which would more than offset a lowering of personal income taxes. Passage of the first part of the tax package would bode well for progress on the rest of the package over the next couple of years. The government previously estimated that a full set of tax reform packages would boost revenue by 2% of GDP by 2019, with administrative measures to add another 1% of GDP over this period.
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