Credit downgrade looms on piling debt, weak GDP

As the government’s debt stock balloons along with the surging domestic coronavirus cases that have prompted the government to reimpose stringent lockdown protocols, sovereign credit rating is seen to be at risk.

Nicholas Mapa, economist at ING Philippines, said in a research note that as the renewed lockdowns weigh on the economy and on consumer sentiment, there have been rumblings of a possible downgrade as the government runs a second month of budget deficits.

“With revenue streams challenged, complicated more by the downscaling of collections from [corporations] due to the passage of CREATE, the Philippines may continue to pile up debt while the economic engines remain stuck in low gear. The combination of weak economic output and rising deficit/debt levels will likely continue to catch the attention of credit-rating agencies with a ‘lockdown grade’ possible unless trends reverse in the near term,” Mapa said.

CREATE refers to the Corporate Recovery and Tax Incentives for Enterprises Act, which was recently signed into law by President Duterte. It slashes corporate income taxes and provides incentives to help businesses recover from the pandemic and encourage foreign investments.

Lockdown strategy “Counterintuitively, the only way out would be to bloat the deficit via a substantial and punchy fiscal rescue plan in a bid to get the public sector viable and the economic engines turning once more,” Mapa said.

“So far lockdowns have been the country’s go-to solution to stem the crisis, but perhaps a change of strategy may be in the works soon enough,” he added.

The government has been reluctant to unleash the fiscal bazooka that economists were hoping for during this pandemic precisely to protect its investment grade rating.

With new cases spiraling anew, the government was forced to reinstate tough lockdown measures in the capital region and adjacent provinces.

“The renewed lockdowns were enough to catch the attention of ratings agencies as the narrative of an economy enjoying above-average medium term growth prospects is fading very fast,” Mapa said.

The economist lamented that while the Philippines headed into the crisis from a position of strength—given its robust consumption and the demographic dividend—a protracted lockdown coupled with the inability to completely quell the virus battered the economy.

“Consumption, the main growth engine, is sidelined and will likely be so in the near term as accelerating inflation complicates an already challenging job market situation. Unemployment remains at elevated levels, increasing actually even as authorities prodded citizens to hit the malls and staycation like they used to,” Mapa said.

“The uptick in unemployment shows that the economic woes of the country go beyond the lockdowns with the economy definitely headed for a lower growth path,” he added.