MANILA -- Fitch Ratings has affirmed the Philippines investment-grade 'BBB' rating with a stable outlook.

The debt-watcher said the rating reflects the country's strong medium-term growth, which supports a gradual reduction in government debt/GDP, and the large size of the economy relative to its peers.

"We expect the Philippines' economy to expand by 5.6 percent in 2025, broadly in line with 2023-2024, fueled by the traditional growth drivers of large public investments in infrastructure, services exports and remittance-funded private consumption," Fitch Ratings said.

Fitch added that it expects easing inflation and interest rates to support private demand. It noted the country's success in taming inflation and how the Bangko Sentral ng Pilipinas eased rates by a cumulative 100 basis points since August 2024 after a 450 bps increase in 2022-2023. 

"Monetary financing of the fiscal deficit during the pandemic was limited and reversed more quickly than in some peers," Fitch noted.

However, it also warned that domestic political uncertainty could affect investment. Fitch said domestic political tensions have escalated ahead of mid-term elections. 

It noted the looming impeachment trial for Vice President Sara Duterte, and the arrest and transfer of former President Rodrigo Duterte to the International Criminal Court in The Hague. 

Meanwhile global trade tensions will likely drag on growth, in particular indirectly through weaker global demand, according to Fitch. But the ongoing tariff war being waged by the United States is not expected to have a big impact on the Philippines, and may even be advantageous for the country, it said.

Fitch noted that the Philippines "is a relatively closed economy, with goods exports of only about 12 percent of GDP in 2024, mostly electronics and machinery."

"Over 16 percent of goods exports were to the US. If the reciprocal tariffs announced by the US in April come into effect, the relatively low tariff rate of 17 percent applicable to the Philippines could be an advantage compared with regional peers. The Philippines' terms of trade could benefit from lower commodity prices or diversion of Chinese exports," Fitch said. 

Investments in infrastructure and moves to further liberalize the economy will also pay off, according to Fitch, with real GDP growth seen rising to over 6 percent in the medium term. 

The budget deficit is also expected to narrow to 3.6 percent of GDP by 2026, after peaking at 5.4 percent in 2022. Fitch also expects the government debt to remain stable, and the current account deficit to remain broadly unchanged over the 2025-2026 period.