PH keeps high credit rating despite debt surge

MANILA, Philippines — Debt watcher Fitch Ratings on Monday not only kept the Philippines’ investment-grade credit ratings of “BBB” but also maintained a rosier view of the economy moving forward despite last year’s projected record slump.

In a report, Fitch said the affirmed rating and “stable” outlook for the Philippines came on the back of “modest government debt levels relative to peers, robust external buffers and still-strong medium-term growth prospects, notwithstanding the deep pandemic-induced economic contraction, against relatively low per capita income levels and indicators of governance and human development compared to peers.”

Fitch said the Philippines’ gross domestic product (GDP) likely shrank 8.5 percent—the worst recorded recession post-war and at the lower end of the government’s projection of 8.5 to 9.5 percent—last year, even as fourth-quarter output picked up amid gradually easing quarantine restrictions.

“The economic impact of the COVID-19 shock for the Philippines in 2020 was more significant than we had previously expected due to the domestic infection rate and government policy measures to curb the spread of the virus. In particular, efforts to contain the virus severely affected private consumption and investment,” Fitch said.

This year and next, Fitch sees GDP growing by 6.9 percent and 8 percent, respectively, within the government’s target bands of 6.5 to 7.5 percent for 2021 and 8 to 10 percent for 2022.

“New daily recorded COVID-19 cases have been declining in recent months, reflecting an effective government response to the crisis and reducing the risk of renewed lockdowns. The authorities have also engaged in multilateral initiatives with several pharmaceutical companies to secure vaccines, with a rollout expected to start in May,” Fitch noted.

Fitch warned that delayed mass inoculation against the deadly coronavirus would pull its growth forecasts down, while an “effective” vaccination program “could result in a faster-than-expected recovery” of the pandemic-battered economy.

Besides a prolonged pandemic, Fitch also sees potential downside risks from the upcoming 2022 elections as well as local governments bigger internal revenue allotment (IRA) next year.

“The presidential election in 2022 creates some uncertainty about economic policies beyond the election, but we expect the medium-term fiscal framework to remain intact, based on the Philippines’ track record,” it said.

“Another uncertainty relates to the fiscal impact of the 2018 Supreme Court ruling requiring increased revenue transfers (in effect, IRA) from the central/national government to [local governments]. Implementation is likely to take effect in 2022, and the government says it plans to ensure it is fiscally neutral by transferring spending assignments to [local governments] in tandem,” it added.

Reacting to Fitch’s assessment, the economic team said in a statement issued by the government’s Investor Relations Office that “the Philippines continues to stand out in the international financial community amid a wave of negative credit-rating actions, which resulted from adverse impacts of the pandemic on the performance and credit profiles of many economies,” noting that the debt watcher last year downgraded 33 economies, some even twice.

“The affirmation of the Philippines’ ‘BBB’ rating with a ‘stable’ outlook shows that the country has remained credit and investment worthy throughout the global COVID-19 crisis. This is because, first, our strong economy on the Duterte watch gave us enough fiscal space to deal with the unprecedented health and economic crises. Second, there is a whole-of-government approach in saving lives, protecting communities and livelihoods, and providing relief to the hardest hit families, workers and businesses. Third, we continued our commitment to prudent fiscal and debt management even as we start spending big on COVID-19 response measures to revive the economy and restore both business and consumer confidence,” Finance Secretary Carlos Dominguez III said.

“We appreciate Fitch’s understanding of the Philippines’ credit and macroeconomic direction amid the global pandemic we are all facing. For our part, the BSP (Bangko Sentral ng Pilipinas) was among the first central banks in the world to respond to the crisis with a policy rate cut as early as February last year. We deemed it important to signal to the market that we were ready to act swiftly and decisively to buoy market confidence as well as to ensure sufficient liquidity and efficient functioning of the financial system,” added Bangko Sentral Gov. Benjamin E. Diokno.

“We implemented a long list of response measures, including unprecedented ones—such as counting of loans to micro, small, and medium enterprises as part of compliance with the reserve requirement—in a manner that was prompt and decisive, ” he said.