Fitch cuts Philippine growth forecast to 6.3%

MANILA, Philippines — Fitch Ratings expects a slower recovery for the Philippines this year, slashing its gross domestic product (GDP) growth forecast to 6.3 percent from the original target of 6.9 percent due to the resurgence of COVID-19 cases.

The London-based rating agency, however, affirmed the Philippines’ ‘’BBB’’ rating and ‘’stable’’ outlook despite the lower growth target and worse than expected impact of the pandemic on the economy.

“We expect the economy to recover at a modest pace, growing by 6.3 percent and 8.3 percent in 2021 and 2022, respectively,” Fitch said in its latest Asia-Pacific sovereign credit overview for the second quarter.

The revised GDP growth forecast was below the 6.5 to 7.5 percent growth target by government economic managers, while the projected expansion next year was higher than the previous eight percent set by Fitch in January.

The Development Budget Coordination Committee (DBCC) is set to meet next month to review the GDP growth targets for 2021 and 2022 in light of the recent imposition of stricter lockdown measures in the National Capital Region and adjacent provinces or NCR Plus until the end of April.

Despite imposing the longest and strictest lockdown in the world since March last year, COVID-19 infections in the Philippines breached the one million mark last Monday with close to 17,000 deaths.

Due to strict mobility and quarantine recession, the country slipped into recession with a record 9.6 percent GDP contraction last year, ending 21 years of positive growth.

“The economic impact of the COVID-19 shock for the Philippines in 2020 was far worse than we had previously expected due to the local infection rate and impact of lockdown measures on domestic activity,” Fitch said.

The credit rating agency   was only expecting an economic contraction of 8.5 percent for the Philippines in 2020.

The debt watcher said the Philippines entered the crisis with fiscal buffers, with a low general government debt-GDP ratio of 34.1 percent in 2019 versus the BBB median of 42 percent.

“These buffers have been eroded significantly by the pandemic shock,” Fitch said.

Fitch expects the general government debt-to-GDP ratio to rise to 52.3 percent and 55 percent of GDP in 2021 and 2022, respectively due to higher borrowings to bankroll the country’s COVID-19 response measures.

Despite the increase, the projected levels are still below the projected peer median of 57.3 percent and 59.4 percent in 2021 and 2022, respectively.

Fitch sees the country’s budget deficit widening to 7.7 percent of GDP next year from 7.6 percent of GDP last year before easing to 6.6 percent of GDP in 2022.

The debt watcher said positive sensitivities to the rating include the sustained broadening of the government’s revenue base that enhances fiscal finances and places the government debt-to-GDP ratio on a downward trajectory.

On the other hand, negative sensitivities include a sustained rise in the government’s debt-to-GDP ratio associated with a reversal of reforms or departure from a prudent macroeconomic policy framework that leads to sustained higher fiscal deficits.

Other negative factors include failure to resume historically high economic growth rates after the COVID-19 shock subsides, potentially reflecting a loss of macroeconomic policy credibility or structural economic damage from the crisis as well as the deterioration in external indicators, including foreign-currency reserves, the current account deficit and net external debt.