Link between credit ratings and vaccinations

One of the main reasons why the market fell last week was the news that Fitch Ratings revised its credit ratings outlook for the Philippines from stable to negative. If the Philippines’ credit ratings were downgraded, our borrowing costs would go up and the peso would weaken. These in turn would have negative repercussions on the economy, explaining the negative reaction of the stock market. To some extent though, Fitch Ratings’ negative revision was not surprising.

Because of the COVID-19 pandemic, our GDP (gross domestic product) contracted 9.6 percent last year, which in turn pulled down the government’s tax revenues, leading to the widening of its budget deficit to 7.5 percent of GDP from only 3.4 percent in 2019.This caused the country’s debt to GDP to jump from a low of 39.6 percent in 2019 to 54.5 percent last year.

If the Philippines continues to recover at a very slow pace, the government will most likely suffer from a large budget deficit and rising debt levels this year and next, weakening the country’s ability to pay its debts. This in turn is expected to prompt Fitch and other ratings agencies to downgrade their credit ratings for the Philippines.

However, it is still too early to conclude that the Philippines’ credit rating will be downgraded for sure.

The global economy is recovering, and this is benefiting the Philippine economy through higher OFW (overseas Filipino workers) remittances and exports.

During the first five months of the year, OFW remittances increased by 6.3 percent while exports jumped by 21.4 percent. While other Asean (Association of Southeast Asian Nations) countries are now suffering from another wave of infections, the number of daily new coronavirus cases in our country is going down.

Note that the average number of daily new cases in the Philippines is now below 5,000 from a peak of more than 9,000 in April.

Although it is too early to celebrate given the threat that the more transmissible Delta variant would spread locally, the fact that infections are under control means the government will not have to tighten mobility restrictions, hampering economic growth.

Finally, and most importantly, the government is doing a good job in vaccinating Filipinos. Although the Philippines does not have enough supply of vaccines yet, the government’s decision to focus on NCR (National Capital Region) plus eight is wise because the said areas account for 63 percent of total COVID-19 cases.

Moreover, the pace of vaccinations is ramping up and is now more than 200,000 doses per day. It could have been faster if not for the limited supply of vaccines.

Nevertheless, more vaccines will be available soon as the government expects 30 million doses to arrive in July and August. To fully consume the said vaccines, the government would have to vaccinate at a pace of around half a million doses per day. Although this is more than twice the current pace, it is not impossible to achieve given that more Filipinos are now willing to get vaccinated and a lot of LGUs (local government units) are now clamoring for more vaccines. Once many Filipinos are inoculated, the government can safely reopen the economy, even with the more worrisome Delta variant.

Note that although the Delta variant is now a dominant strain in the United States and the United Kingdom, both have decided against locking down again. This as the number of deaths remains low despite the increasing number of infections. Presently, 48 percent and 66 percent of the US and UK population are fully vaccinated. The sustainable reopening of the Philippine economy prompted by the mass vaccination of Filipinos will help boost economic growth and improve the government’s ability to pay its debts. This in turn will eliminate the threat of a credit ratings downgrade. INQ (In my column last June 21, I mentioned that Aboitiz Power’s large uncontracted capacity will make it a beneficiary of the tight power supply situation in the country. Although I still expect Aboitiz Power to benefit from the tight power supply situation, I would like to clarify that Aboitiz Power’s uncontracted capacity is less than 10 percent, which is not large but higher than that of other listed power generation companies, except for Semirara which has the highest uncontracted capacity. Apologies for the mistake. )