Fitch keeps PH’s investment-grade credit rating despite debt escalation

(File) This photo taken on January 29, 2019 shows a general view of the skyline of the financial district of Makati in Manila. (Photo by Ted ALJIBE / AFP)

MANILA, Philippines—Despite a pandemic-induced, 16-year-high public debt ratio, the Philippines’ investment-grade credit rating has been retained by major debt watcher Fitch Ratings while the economy recovers.

The ‘BBB’ rating — one notch above minimum investment grade — was kept on Feb. 17, alongside a “negative” outlook, which meant that the current rating may be downgraded.

In its report, Fitch said the Philippines’ unchanged credit rating “balances strong external buffers and growth against lagging structural indicators, including per capita income and governance.”

“It also reflects weak government revenue mobilization compared with peers and government debt-to-GDP [gross domestic product ratio] that rose sharply from pre-COVID-19 pandemic levels but is forecast to stay close to the ‘BBB’ median over the next few years,” Fitch said.

The share of the national government’s outstanding debt to the economy jumped from a record-low 39.6 percent in 2019 to 60.5 percent in 2021 as it heavily relied on borrowings mostly sourced locally to finance COVID-19 response when revenues weakened due to the pandemic-induced recession at the height of the most stringent lockdowns two years ago.

But credit rating agencies, like Fitch, look more closely at the general government debt — combined obligations of the national government, local governments and social security institutions, less their bond holdings.

“The Philippines’ debt trajectory will depend on the balance of fiscal consolidation and ongoing government spending to support the economic recovery,” said Fitch.

“We project general government debt-to-GDP to reach 54.5 percent in 2022, then decline to 53.1 percent in 2023, from an estimated 54 percent in 2021 (and 48.1 percent in 2020),” it said.

“This is still below our ‘BBB’ median forecast of 55.3 percent in 2022 and 56.6 percent in 2023. However, we expect the debt-to-revenue ratio of 278.7 percent in 2022 to exceed the ‘BBB’ median of 257 percent,” Fitch added.

Finance Secretary Carlos Dominguez III was quoted by a Bangko Sentral ng Pilipinas (BSP) statement on Friday as saying that “considering the years of fiscal prudence, the rise in debt because of the pandemic did not prevent the country from having a favorable debt structure and ample access to low-cost funding.”

The BSP cited Fitch’s estimates showing that general government interest payments as a share of general government revenues stood at 9 percent last year.

Photo courtesy of Bangko Sentral ng Pilipinas Facebook Page

“The government has accommodated the huge cost of COVID-19 crisis response to help vulnerable sectors survive and recover from the crisis, largely because of President Duterte’s comprehensive tax reform program and his policy of prudent fiscal management and discipline,” Dominguez was quoted as saying.

“But we are also mindful not to pass on to future generations unsustainable debt,” he said.

“Estimated to have reached around 54 percent of GDP in 2021, the general government’s debt remains manageable, and we expect this to remain at around the same level this year and the next,” Dominguez added.

Fitch also attributed the negative outlook to “uncertainty about medium-term growth prospects as well as possible challenges in unwinding the policy response to the health crisis and bringing government debt on a firm downward path.”

Fitch said it expects the Philippine economy to grow 6.9 percent this year and 7 percent next year, to be supported by “pick-up in vaccination rates, falling COVID-19 infection numbers, [and] normalized economic activity — particularly in services — after tight containment measures in 2020 and part of 2021.”

“The fiscal and monetary policy response, strong infrastructure spending and resilient remittances and exports is also boosting the recovery,” Fitch added.

However, Fitch pointed to lingering downside risks to economic recovery like the prolonged pandemic and possible infection waves due to new COVID variants, and pandemic-related scarring effects on medium-term growth prospects.

“Presidential elections scheduled for May 2022 also create uncertainty around the post-election fiscal and economic strategy, although we assume broad policy continuity will be maintained given the Philippines’ record of a generally sound policy framework,” Fitch said.

For Bangko Sentral ng Pilipinas Governor Benjamin Diokno, “the Philippine economy is on a strong recovery path, as Fitch affirmed our ‘BBB’ investment-grade credit rating amid a wave of downgrades in many other countries.”

“The BSP expects the steady acceleration in credit activities and favorable inflation outlook to support growth prospects moving forward,” Diokno said in a tweet.

“In our first monetary policy report, the Monetary Board kept the policy rate at a record-low of 2 percent to support continued economic recovery,” he said.

“The Philippine banking system has kept the impact of the crisis manageable,” Diokno said.

“Philippine banks continue to serve the rising demand for credit. We also expect inflation to stay well within the target range of 2-4 percent this year up to 2024, which will provide an enabling environment for consumption and investments,” he added.

Credit ratings are a measure of a government’s creditworthiness. As the stability of state finances was also related to a country’s performance, credit scores serve as a proxy grade for the economy.

Improved ratings would allow the government to demand lower rates when it borrows from lenders, which could translate to lower interest rates for consumers and businesses borrowing from banks using government-issued debt paper as benchmarks for their loans.

TSB