Delayed recovery is credit negative for Philippines – Moody’s

MANILA, Philippines — Moody’s Investors Service warns that delayed recovery from the pandemic-induced recession, as the number of COVID-19 infections soars to new record levels, is credit negative for the Philippines.

In its latest issuer comment, the debt watcher said the new pandemic containment measures last March 22, including a ban on mass gatherings and indoor dining in restaurants, imposition of a 6 p.m. to 5 a.m. curfew, and stay-at-home order for all minors and senior citizens, would “delay economic recovery and weigh on prospects for fiscal consolidation and exacerbate social risks.”

Despite imposing the longest and strictest lockdown when Luzon was placed under enhanced community quarantine (ECQ) in the middle of March last year, COVID-19 infections have breached the 700,000 level, with more than 13,000 deaths.

The resurgence of COVID-19 cases hitting daily records over the past few weeks prompted the national government to place Metro Manila and nearby areas under ECQ anew from March 29 to April 4.

“Although current measures are more forgiving than the severe lockdowns imposed in 2020, they contrast with the easing of restrictions elsewhere in the region, where infection rates are low or falling,” Moody’s said.

At the height of the lockdown, Moody’s affirmed the country’s credit rating of Baa2 – a notch above minimum investment grade – with a stable outlook in July last year.

The debt watcher pointed out that its seven percent gross domestic product (GDP) growth target for 2021 is threatened as the two-week lockdown could remain in effect until the second quarter as it is unlikely to reduce infection rates to the lower levels earlier in the year.

The Philippines booked a record 9.5 percent GDP contraction last year, ending 21 years of positive growth, as the economy stalled due to the strict lockdown and quarantine restrictions.

The slowdown eased from a record 16.9 percent in the second quarter of last year to 11.4 percent in the third quarter, and 8.3 percent in the fourth quarter, with the reopening of the economy when the National Capital Region (NCR) shifted to general community quarantine (GCQ) in June last year.

“Because the Philippines had the deepest contraction among large, developing ASEAN economies last year, its inability to contain the spread of the coronavirus slows the return of aggregate output to its 2019 peak,” Moody’s said.

The rating agency said the weaker economic growth diminishes prospects for fiscal and debt consolidation as the government’s 2021 budget calls for 10 percent growth in spending, assuming that economic recovery is firmly entrenched by the second half.

Moody’s noted that Republic Act 11534 or the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act which reduces the tax rate on businesses to 20 from 30 percent, could worsen near-term weakness in tax revenue.

“Although the CREATE Act introduces limits to tax incentives that will expand the tax base over the long run, policymakers saw this measure as facilitating the recovery from COVID, in part by lowering corporate income tax rates.

Amid higher borrowings to finance COVID-19 response measures, the country’s debt stock rose sharply to 54.5 percent of GDP last year from 39.6 percent in 2019.

On the other hand, Moody’s Analytics associate economist Dave Chia said the Philippines continues to struggle with a resurgence of the virus this month, prompting the government to shut its border to foreigners and impose additional restrictions in its capital region and four neighboring provinces.

“We maintain our outlook that the Philippines will be one of the worst-performing economies in Southeast Asia, at least for the first half of 2021,” Chia said in the research note titled “Divergence of recovery in Asia.”

Despite its vaccine rollout earlier this month, Chia said the country is still far from securing enough vaccine doses to achieve herd immunity, trailing behind most Southeast Asian countries.

“The country’s target of inoculating most of its population this year will play a pivotal role in the recovery of the consumption-driven economy. However, the current vaccine rollout is evolving at a slow pace, and the country is unlikely to achieve herd immunity until late 2022,” Chia added.

Moody’s Analytics is currently reviewing its GDP growth forecast of 6.3 percent this year in light of recent developments. This is lower than the 6.5 to 7.5 percent growth penned by the Development Budget Coordination Committee (DBCC) for this year.

“The Philippines is one of the two economies that remain at risk in the Southeast Asia region because of the upsurge of COVID-19 cases. As consumption is a major component of the country’s economic activities, curbing the spread of coronavirus and vaccination are key to its economic recovery,” Chia said.