Dominguez: Credit rating downgrade possible if pre-pandemic metrics used

MANILA, Philippines—President Duterte’s chief economic manager on Wednesday (July 21) said there could be a downgrade in the country’s investment grade credit rating judging from the recent deterioration in the Philippines’ debt and fiscal metrics using pre-pandemic standards.

But Finance Secretary Carlos Dominguez III said the public debt level already peaked in the first quarter, as the government began to wind down borrowings and narrow the budget deficit alongside expected economic recovery starting this year.

The recent downgrade in the Philippines’ credit-rating outlook to “negative” from “stable” previously by Fitch Ratings was “reasonable,” Dominguez said in a Bloomberg TV interview. The downgrade was partly due to a ballooning debt and bigger fiscal deficit.

“That is reasonable, because of the fear of the pandemic coming back. I think they’re OK in doing that,” Dominguez said.

“But let’s also remember that Fitch is only one of about four or five rating agencies. Let’s wait for what the other guys say,” he added.

Amid fiscal risks like next year’s implementation of a Supreme Court ruling that upheld higher tax shares for local governments and increasing pension of retired men in uniform, Dominguez told members of Financial Executives Institute of the Philippines (Finex) that “of course we are going to be in a difficult situation.”

“Of course, there’s the possibility that our credit rating will be downgraded,” Dominguez said.

“But let me ask, and this is the question I have asked the rating agencies, and they have not given me the answer: Have we slid down the curve, or has the curve been forced downwards?” he said.

“Now, if the curve has been forced downwards, is it still correct to use old standards?” Dominguez said.

“2020 is a year of disconnect, I think for the entire world,” he said.

“I think what has happened is that the entire growth curve has been forced downward by this little virus. So what are we going to do? Are we going to use old standards, or are we going to adjust the standards?” Dominguez said.

“I really don’t know — I’m not a credit-rating guy. But you know, if you want to use the old standards and downgrade us, fine!” he said.

He also noted that these debt watchers were “not infallible”, citing the experience before the 2008 global financial crisis when these credit-rating agencies assigned strong ratings to bad assets.

The latest official government data placed debt-to-gross domestic product (GDP) — which reflected an economy’s capacity to pay its obligations — at a 16-year high of 60.4 percent as of end-March. It breached what debt watchers considered as the manageable public debt threshold of 60 percent.

“We don’t see that [debt-to-GDP] increasing much beyond that amount. We think that’s about the peak,” Dominguez said.

Dominguez earlier said the debt-to-GDP ratio will settle at 58.7 percent by yearend, higher than 54.6 percent in 2020 and the record-low 39.6 percent in 2019.

On top of winding down debt, Dominguez said the national government was also on its way to narrowing the budget deficit from 9.3 percent of GDP this year to 7.5 percent next year “and from there, steadily down to where it was in 2019.”

In nominal terms, this year’s budget deficit will amount to P1.86 trillion, and next year’s, P1.67 trillion.

The Cabinet-level Development Budget Coordination Committee (DBCC) programmed the budget deficit for 2023 at 5.9 percent of GDP, and 4.9 percent for 2024.

“We have to make sure that we manage the economy in a fiscally responsible way, so that in case we still have shortages, which we will, we will be able to access the credit markets” amid the prolonged pandemic, Dominguez said.

The finance chief said the bulk of borrowings for this year will be sourced locally. “We’re keeping ourselves open to financing from domestic or international sources.”

Dominguez said that as far as additional economic stimulus, as proposed by Congress, was concerned, the government will only give away “what is affordable, and what is necessary.”

“If we have a more difficult situation, of course, we will reconsider the path we are on. We’re not gun-shy, and we will keep our mind open to all possibilities,” Dominguez said.

“But as of the moment, I think we have tread a path that is sustainable, that is reasonable. And I think that has preserved our resources for possible events such as another surge,” he added.

TSB