Pandemic strategy gets Fitch's nod with investment grade kept
MANILA, Philippines (UPDATE 1:36 p.m., Jan. 11) — Debt watcher Fitch Ratings affirmed the Philippines’ investment grade rating on Monday, in an approval to the Duterte administration’s coronavirus strategy while flagging potential risks from a change in leadership in 2022.
In a statement on Monday, Fitch kept the sovereign’s “BBB” rating, while assigning a “stable” outlook on it that essentially means there is unlikely to be change in assessment over the next 18-24 months.
Fitch’s decision should bolster government belief that its coronavirus response is working. That tack has specifically avoid a massive fiscal stimulus to jumpstart the economy in recession and while continuing an infrastructure program, which critics said is insufficient and ineffective to address the ongoing health crisis.
In July last year, at the height of the pandemic, Moody's Investors Service did the same and kept the Philippines under the investment grade status.
“The affirmation balances modest government debt levels relative to peers, robust external buffers and still-strong medium-term growth prospects, notwithstanding the deep pandemic-induced economic contraction,” Fitch Ratings said.
The Duterte government had set its sights for an “A” rating by 2022, before the coronavirus messed with its plans. Economic officials said bagging an “A rating would have to take a backseat for now as all efforts are directed to contain the outbreak and resuscitate a weakening economy.
Since the pandemic struck, it was no secret that economic managers have shrugged off calls for fiscal stimulus in a bid to keep the Philippines’ hard-earned investment grade rating that allows the government to borrow at much lower costs. That however did not stop borrowings to balloon and fund a record-high deficit which likely reached 6.9% of gross domestic product last year.
For this year, the US-based credit rater said the budget gap would widen further to 7.7% before narrowing slowly to 6.6% in 2022. As a result, debt would also increase to 55% of GDP by 2022, which, if realized, would be the highest since 2006. The debt ratio was at a record-low of 39.4% in 2019.
“Fitch will monitor the post-pandemic evolution of the fiscal deficit and debt levels as the balance between fiscal consolidation and ongoing government spending to support economic growth will be an important consideration for the rating…,” it said.
Vaccine delays, 2022 polls pose risks
But despite growing budget shortfalls, it was also evident that the economy is not getting enough support from the government. Fitch noted that the coronavirus’ impact on the economy was “more significant than we previously expected” due to the inability to control infections and lingering effect of lockdowns on industries and consumers. Despite maintaining progress in infrastructure investments, Fitch forecast the pandemic likely brought down Philippines’ GDP by 8.5% last year.
Growth between 6.9%-8% could return this year, it added, although that projection is subject to “downside risks” of delays in vaccine rollout. The Philippines said on Monday vaccines should start arriving next month.
“New daily recorded Covid-19 cases have been declining in recent months, reflecting an effective government response to the crisis and reducing the risk of renewed lockdowns,” Fitch said.
Apart from slow inoculations, Fitch likewise said credit risks lie on the upcoming 2022 presidential elections that can usher in a new administration that may or may not stick with the Duterte administration’s current strategy. Even before that can happen, Fitch is also worried about the impending enforcement of a 2018 Supreme Court ruling that gave bigger revenue share to cities and provinces, thereby reducing the portion for the state.
Lending by the central bank to the government was also questioned.
“The Philippines’ structural indicators remain weaker than peers’, including per capita income, governance standards and human development…,” Fitch said.
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