OREANDA-NEWS. Fitch Ratings has affirmed the Philippines' Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'BBB-' and 'BBB' respectively. The issue ratings on the Philippines' senior unsecured foreign and local currency bonds are also affirmed at 'BBB-' and 'BBB' respectively. The Outlooks on the Long-Term IDRs are Stable. The Country Ceiling is affirmed at 'BBB' and the Short-Term Foreign Currency IDR at 'F3'.

KEY RATING DRIVERS

The sovereign rating of 'BBB-' for the Philippines reflects the following key rating drivers:

- Strong macroeconomic performance. The steady inflow of worker remittances and growth of the business process outsourcing industry underpins the country's economic growth. Fitch forecasts real GDP to grow at 6.3% in 2015 and 6.2% in 2016. The Philippines' five-year real GDP growth was estimated to be 6.3% at the end of 2014, which is far above the 'BBB' median of 3.0%.

- External finances as a key credit strength. Sustained current account surpluses since 2003 have supported the build-up in FX reserves and turned the country into a net external creditor. Fitch estimates the country was a net external creditor at 15.4% of GDP at the end of 2014, compared with the 'BBB' median net external debtor position of 4.7% of GDP.

- Public finances as a neutral factor. Fitch's assessment balances declining general government debt ratios against limited progress in widening the government revenue base. Fitch expects general government debt to reduce further to 34.4% of GDP in 2016 from an estimated 36.4% at the end of 2014. Sustained fiscal discipline and the propensity of the government to underspend keeps the fiscal deficits low. The Philippines' revenue and grants at 15.1% of GDP at end-2014 was much lower than the 'BBB' median of 28.6% of GDP.

- Weak governance standards and low per capita incomes. Governance standards as measured by international organisations, such as the World Bank, remain below the 'BBB' median. Governance standards have strengthened under the Aquino administration since 2010. However, the Philippines continues to score especially low on the World Bank's Ease of Doing Business and Political Stability metrics, at levels that are far below the 'BBB' median. The Philippines' per capita income was low at USD 2,836 in 2014 compared with the 'BBB' median of USD10,654.

- Strong credit growth. Abundant domestic liquidity and generally buoyant economic conditions have supported a sustained period of strong credit growth. Growth in credit to the private sector has averaged about 16% over 2010-14. However, the aggregate size of the banking system remains moderate. Fitch estimates bank credit to the private sector was 39.2% of GDP at end-2014, below the 'BBB' median of 66%. The authorities have stepped up their monitoring of risks around the real-estate sector. This abundance in liquidity has not led to evidence of overheating but it is a risk that bears monitoring over the medium-term. The inflation outlook remains close to the Central Bank's target range. Fitch also expects that an increase in US interest rates in the near term could ease pressure on domestic liquidity.

RATING SENSITIVITIES

The Stable Outlook reflects Fitch's assessment that upside and downside risks to the rating are currently well balanced.

The main factors that individually or collectively might lead to positive rating action are: -
- Continued strengthening in governance standards that leads to a better business climate, which supports higher domestic and foreign investment.
- Strong GDP growth accompanied by narrowing of income and development differentials with 'BBB' range peers, without the emergence of imbalances.
- A broadening of the general government revenue base that lends stability to the government finances.

The main factors that could, individually or collectively, lead to negative rating action include: - A sustained period of overheating that leads to instability in the financial system could be considered credit negative.
- Deterioration in governance standards or a reversal in reforms that were implemented under the Aquino administration.

KEY ASSUMPTIONS

- Fitch assumes that an increase in US interest rates would not lead to a sudden stoppage in capital flows to emerging economies.