Moody’s keeps investment-grade rating for PH despite pandemic

Debt watcher Moody’s Investors Service on Thursday (July 16) kept the Philippines’ investment-grade credit rating and “stable” outlook, auguring well for the government’s plan to borrow more to finance the increasing costs of responding to the health and socioeconomic crises caused by the COVID-19 pandemic.

While the “BAA2” rating will allow the Philippines to secure borrowings at lower rates, Moody’s projected the gross domestic product (GDP) to shrink by 4.5 percent this year—faster than earlier government estimates of 2-3.4 percent contraction—as the pandemic raged on.

“The rating affirmation and stable outlook reflect Moody’s view that the fortification of the government’s fiscal position in recent years provides a buffer against a rise in public indebtedness due to shocks such as the ongoing global coronavirus outbreak,” Moody’s said in a report.

“Relatedly, the track record of prudent economic and fiscal management, and a robust banking system, contribute to stable access to funding at moderate costs and support prospects for fiscal consolidation and debt stabilization after the shock subsides,” it said.

Last May, the Cabinet-level Development Budget Coordination Committee (DBCC) projected the debt-to-GDP ratio to reach 49.8 percent by end of 2020, equivalent to a record P9.6 trillion in outstanding debt, before further rising to 51.5 percent in 2021 and 52.3 percent in 2022.

The last time the Philippines had a debt-to-GDP ratio above 50 percent was 2010’s 50.2 percent.

Prior to the pandemic, the Philippines’ debt-to-GDP—the ratio reflecting a country’s ability to pay its obligations—fell to 39.6 percent in 2019, the lowest since 1986.

“Beyond proposed legislation aimed at facilitating the near-term recovery from the pandemic shock, Moody’s expects that more structural economic and fiscal reforms will be on hold for some time, delaying potential further improvements in the Philippines’ credit profile,” Moody’s said.

“And in contrast to strong policy effectiveness, governance weaknesses especially with regards to perceived constraints on civil society and the judiciary, continue to weigh on the rating,” it said.

Also, Moody’s had a less rosy economic outlook for the Philippines following one of the most stringent lockdowns in the region that resulted in a recession during the first half of 2020.

“Moody’s expects a sharp economic contraction which will undermine the Philippines’ fiscal strength somewhat by contributing to a sharp drop in revenue, raising the government’s debt burden and weakening debt affordability,” Moody’s said.

“However, fiscal strength will remain consistent with similarly-rated peers,” it said.

The debt watcher, however, has a rosy outlook in 2021 for the Philippines.

It said after a “sharp economic contraction” in 2020, which it said was the worst in 35 years, it projects real GDP growth to rebound to 6.5 percent in 2021 “and converge towards potential rates of around 6 percent per annum thereafter.”

“Unless the Philippines faces a significant and prolonged drop in remittances and an acceleration in the fragmentation of regional supply chains, growth potential will continue to be boosted by favorable demographics and ongoing improvements in the investment climate,” it added.

President Rodrigo Duterte’s economic managers welcomed Moody’s affirmation of the Philippines’ credit rating.

Finance Secretary Carlos G. Dominguez III said: “I was told that as of end-June 2020, Moody’s has downgraded the credit ratings of 18 sovereigns and revised to ‘negative’ the outlook on the ratings of 27 sovereigns.”

“The COVID-19 pandemic is a black swan that has shoved countries, including the Philippines, into what is shaping up to be the world’s worst economic downturn since the Great Depression,” Dominguez said in a separate statement by the government’s Investor Relations Office (IRO).

“But what separates our country from most virus-hit economies is that we were caught up in this global health crisis with ample buffers to cushion its fallout while keeping our debt level manageable and without compromising our fiscal health,” said Dominguez.

“Given the prudent management of the economy under the leadership of President Duterte, along with the bold initiatives such as tax reform that he has carried out since he assumed office in 2016, the Philippines has wielded enough fiscal space ahead of the deepening coronavirus crisis,” he said.

“Such fiscal space has let the Duterte administration to spend big on its four-pillar strategy to beat the COVID-19 pandemic, which is anchored on providing relief to the poor and other badly hit sectors, beefing up our health care capacity, and stimulating the domestic economy to an early and strong recovery,” Dominguez said.

“We thank Moody’s for recognizing our country’s strengths in the face of this unprecedented global crisis,” said the finance chief.

“We also thank the two chambers of the Congress for their close working relationship with the executive department,” Dominguez said.

Congress, he said, showed this cooperation through continued support for Duterte’s policies “and timely action on our priority legislative measures that have become our shield in protecting the country’s sterling credit standing.”

“On the back of such strong fundamentals, the Duterte administration is committed to a calibrated reopening of the domestic economy in order to quickly restore business and consumer confidence,” Dominguez said.

This would be done, he said, “while holding on to certain mobility restrictions and strict health protocols meant to further slow COVID-19 spread, save lives and protect communities.”

For his part, Bangko Sentral ng Pilipinas Governor Benjamin E. Diokno said: “The Philippines entered this crisis in a position of strength characterized in part by healthy external accounts, sound and stable banking system, and manageable inflation.”

“Complementing these buffers are the prompt, decisive and extraordinary measures implemented by the BSP and the national government to save lives and livelihoods, and to make sure we emerge from this crisis stronger than before,” Diokno said.

“The BSP has already done a long list of relief measures, and we stand ready to do more if needed, especially as our policy space and tool kit are far from being exhausted,” he said.

“The affirmation of our credit rating by Moody’s—together with the recent favorable actions on the Philippines by other credit rating agencies—show that important stakeholders from the international community recognize that the Philippines is on the right track as far as managing the effects of the COVID-19 crisis is concerned,” Diokno said.

Credit ratings are a measure of a government’s creditworthiness. As the stability of state finances was also related to a country’s performance, credit scores serve as a proxy grade for the economy.

Improved ratings would allow the government to demand lower rates when it borrows from lenders, which could translate to lower interest rates for consumers and businesses borrowing from banks using government-issued debt paper as benchmarks for their loans.

TSB