After Moody’s, Fitch warns of credit rating risk from uncontained virus

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After Moodyâs, Fitch warns of credit rating risk from uncontained virus
Thousands of locally stranded individuals, who are beneficiaries of the second batch of the Hatid Tulong program, are surrounded by their belongings as they spend the night on the bleachers of the baseball stadium of the Rizal Memorial Sports Complex in Manila on July 24, 2020.
The STAR / Miguel de Guzman

MANILA, Philippines — Another major credit rating agency has raised red flags over the potential impact of a long-running coronavirus health crisis on the Philippines’ creditworthiness.

Fitch Ratings on Friday echoed warnings from Moody’s Investors Service that a failure to get the coronavirus disease-2019 (COVID-19) pandemic contained put at risk both the economy’s record of strong growth and the government’s healthy balance sheet which both support Fitch’s BBB investment-grade rating. The rating has a stable outlook, which means changes are unlikely over the next 12-18 months.

“Given the Philippines’ difficulty in containing the virus, these downside risks are materializing and our current growth forecast of -4% for 2020 now seems optimistic and is likely to be revised down,” Sagarika Chandra, Fitch’s associate director, said in an e-mail.

“The government’s projections of the fiscal deficit have correspondingly widened,” she said.

Fitch issued the statement in response to queries over how the debt watcher sees the second-quarter’s 16.5% record contraction, which prompted the Philippines’ plunge to technical recession, would impact the government’s creditworthiness, one that economic managers have been careful not to damage.

This matters after the Duterte administration has continued to reject legislative proposals for a larger stimulus to fight the pandemic, calling them unaffordable that can derail years of fiscal prudence and lower the country’s credit rating that has allowed the Philippines to borrow funds at much lower costs.

But as it appears, Chandra indicated that the longer the virus spreads beyond the control of authorities, the higher the risk that budget stability, characterized by low deficits and debts, would deteriorate. “These buffers are being eroded given the impact of the pandemic,” she said.

Specifically, from 46% of gross domestic product in 2021 seen last May, general government liabilities are now seen to rise to 48% of GDP as early as this year. Although Chandra said the figure is “still below the projected peer median of 51.7%.” 

“There is still some room at the Philippines’ rating level to accommodate some deterioration in the fiscal outlook,” she added.

In addition, Fitch’s projections of fresh lockdowns last May have likewise emerged. “The Philippines’ near-term growth outlook has continued to deteriorate as a result of the ongoing coronavirus pandemic and imposition of modified lockdown measures in and around Metro Manila,” Chandra said.

Last July 28, economic officials revised their macroeconomic and budget projections downwards to take into account repercussions from a lingering pandemic. It marked the third time projections were amended since May.

Under the current forecasts, bigger revenue losses of up to 20% annually and wider budget deficits of as much as 9.6% of GDP this year were included. Slower growth of 6.5-7.5% over the next two years were also laid out.

Chandra said Fitch, which lowered the country’s credit rating outlook to “stable” from “positive” last May, will be monitoring local developments.

“In our ongoing monitoring of developments, we will assess the likelihood that after the coronavirus shock subsides the fiscal deficit and public debt trajectory will be restored in line with the authorities’ medium-term framework,” she said.

“We will also assess the extent to which the crisis may impact the Philippines’ strong medium-term growth potential, which has been a support for the rating,” she added.

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