Fitch keeps ‘negative’ outlook on PH investment-grade rating

The Philippines needs to watch its declining international reserves as Fitch Ratings maintained a “negative” outlook on the national government’s investment-grade credit rating of BBB, according to Bank of the Philippine Islands lead economist Emilio Neri Jr.

Fitch Ratings last week announced that they maintained the combination of BBB negative for the Philippines’ credit tag as a long-term borrower from foreign lenders, which stretches back to July 2021.

Back then, the credit watchdog revised the outlook from stable, recognizing downside risks to medium-term growth prospects as a result of potential scarring effects, and possible challenges associated with unwinding the exceptional policy response to the health crisis and restoring sound public finances as the pandemic recedes.

This time, the negative outlook reflects the risks to the Philippines’ medium-term growth prospects, fiscal adjustment path and external buffers in an environment of higher interest rates, weaker external demand and higher commodity prices.

Negative denotes a possible, but not inevitable, ratings downgrade within one to two years.

A BBB rating means that the Philippine government has “good credit quality.” It is a notch below an “A” rating that denotes “high credit quality” and a notch above a “BB” rating, which means lending to the country is “speculative” and “an elevated vulnerability to default.”One of the factors that Fitch Ratings said could lead to a downgrade would be a significant deterioration in foreign-currency reserves and the country’s net external creditor position, “for example, due to … large interventions to support the currency.”

Ratings action

“The latest Fitch statement validates our view that analysts can’t downplay reserve inadequacy or lack of external buffers as a criterion for ratings outlook or actions,” Neri said, referring to fellow economists who focus too much on the country’s debt-to-GDP ratio.

This ratio was pegged at 60.4 percent at the end of 2021, breaching the 60-percent level that is internationally considered the limit of a product debt profile for a country.

The country’s debt stock worsened to 63.5 percent of the domestic economy at the end of March, but improved to 62.1 percent at the end of June.

“Even if our debt-to-GDP ratio drops, a significant decline in our foreign exchange reserves coverage can lead to lower sovereign risk ratings,” Neri said. “It may be foolish to downplay reserve adequacy amid the worsening global food and energy security challenges.”

As of the end of September, the Bangko Sentral ng Pilipinas (BSP) said the gross international reserves (GIR) was pegged at $93 billion. This meant that $4.4 billion bled out from the BSP’s reserves that were pegged at $97.4 billion at the end of August.

The GIR reached an all-time high of $110.12 billion in December 2020, and has been decreasing month after month since $107.8 billion last February. INQ