Credit rating at risk due to delayed recovery

A delayed economic rebound due to recent tighter restrictions to curb a surge in COVID-19 infections is a “credit negative” risk to the Philippines’ investment-grade rating, debt watcher Moody’s Investors Service said Monday.

But more than the potential impact on the government’s borrowing costs, Moody’s said “the renewed measures will delay economic recovery, weigh on prospects for fiscal consolidation and exacerbate social risks” such as poverty, income inequality and joblessness.

Moody’s was referring to the tighter localized restrictions nationwide and the revert on Monday to a one-week enhanced community quarantine —the strictest lockdown level—in Metro Manila and four neighboring provinces accounting for half of the economy as COVID-19 cases peaked to new highs after new and more contagious variants emerged.

“Although current measures are more forgiving than the severe lockdowns imposed in 2020, they contrast with the easing of restrictions elsewhere in the region where infection rates are low or falling. Because the restrictions are unlikely to restore infection rates to the better levels of earlier in the year, some of the restrictions will likely remain in effect well into the second quarter, threatening our forecast for a 7-percent rebound in real GDP (gross domestic product) growth in 2021,” Moody’s said.

Slump

Moody’s noted that last year, the Philippines posted the biggest economic contraction of 9.5 percent in Asean (Association of Southeast Asian Nations) such that nominal GDP dipped to P18 trillion in 2020 from P19.5 trillion in 2019. The government targets a conservative 6.5 to 7.5 percent GDP growth this year.

Stimulus

“Weaker economic growth diminishes prospects for fiscal and debt consolidation. The government’s 2021 budget calls for 10-percent growth in spending, assuming that economic recovery is firmly entrenched by the second half. The tightened restrictions on households and businesses have prompted calls for another stimulus package while the weak economy weighs on taxable income,” Moody’s added.

Economic managers on Monday confirmed financial assistance to 22.9 million individuals belonging to the bottom 80-percent incomes in areas under lockdown, which included Bulacan, Cavite, Laguna and Rizal provinces.

While it will be President Duterte to announce on Monday night the total amount of assistance and in what form—whether monetary or in goods—it will be given away, Finance Secretary Carlos Dominguez III said these dole-outs from the national government was expected to keep the budget deficit cap within the programmed 8.9 percent of GDP for 2021.

“At the same time, the recently passed Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act may worsen near-term weakness in tax revenue. Although the CREATE Act introduces limits to tax incentives that will expand the tax base over the long run, policymakers saw this measure as facilitating the recovery from COVID in part by lowering corporate income tax rates,” Moody’s said, referring to the billions of pesos in foregone revenues as a result of the reduction in firms’ income tax rates retroactively to July 2020.

The renewed lockdown was also “highly negative” in terms of social risks, Moody’s said. “A delayed recovery will have effects on labor markets that could exacerbate income inequality and poverty. The government’s new measures could reverse recovery in the unemployment rate, which fell to 8.7 percent in the first quarter from a peak of 17.6 percent in the second quarter of last year; and the poverty incidence rate, which fell to 16.7 percent in 2018 from 26.3 percent in 2009 amid rapid economic growth.”

In a separate report, Moody’s Analytics associate economist Dave Chia said that in terms of economic recovery during the first half of 2021, the Philippines stood out as the laggard in the region.

“Despite its vaccine rollout earlier this month, the country is still far from securing enough vaccine doses to achieve herd immunity, trailing behind most Southeast Asian countries. With additional targeted lockdowns and foreign travel bans imposed recently, the prospects for improved consumer spending and tourism remain gloomy and employment gains in the upcoming months will be limited,” Chia said.

“The country’s target of inoculating most of its population this year will play a pivotal role in the recovery of the consumption-driven economy. However, the current vaccine rollout is evolving at a slow pace and the country is unlikely to achieve herd immunity until late 2022,” Chia added. INQ