Signs of 'recovery' convince S&P to keep Philippines' investment grade

MANILA, Philippines — Debt watcher S&P Global Ratings kept the Philippines’ investment grade rating, citing emerging signs of economic recovery that could ease the strain on the government’s balance sheet that's tarnished by the pandemic.

In a statement on Thursday, S&P affirmed the sovereign’s triple B plus rating while assigning a “stable” outlook, which means there is unlikely to be any changes in its assessment over the next 18-24 months.

“We affirmed the ratings because we believe the Philippines will continue to have good economic recovery prospects once the COVID-19 pandemic is contained, and that the government's fiscal performance will strengthen accordingly,” S&P explained.

“The Philippines' economy is beginning to recover, and growth should accelerate further in 2022 as the pace of COVID-19 vaccinations picks up and the pandemic becomes more contained,” it added.

The action followed a similar move from Fitch Ratings last January, making S&P the latest credit rating agency to approve of the Duterte administration’s pandemic strategy. That tack has specifically avoided a massive fiscal stimulus to jumpstart the economy in recession, in a desperate bid to protect the country’s well-prized credit ratings that allow the government to borrow at cheaper costs.

As expected, Finance Secretary Carlos Dominguez III welcomed S&P’s decision. “(S)olid financial buffers and prudent fiscal management have placed the Philippines in a relatively strong position to generate the needed funds for COVID-19 response without touching off a worrisome debt situation down the road,” Dominguez said in a statement.

Bangko Sentral ng Pilipinas Governor Benjamin Diokno agreed with Dominguez. “The move of S&P… echoes our view that the impact of the COVID-19 crisis on the economy will be transitory and that the Philippines continues to enjoy bright medium-term growth prospects,” Diokno said.

For S&P, it was this “long track record of fiscal prudence” even during hard times that shielded the state’s balance sheet from further deterioration. But while the limited spending indeed helped keep the government’s debt at manageable levels, critics said the hesitation to unleash a massive fiscal response is the reason why the country has remained in recession for five straight quarters now.

In the first three months of the year, gross domestic product shrank an annualized 4.2%, convincing many observers that the Philippines is a clear laggard in the region. But if there’s any consolation, there was a minimal 0.3% gain on a quarter-on-quarter basis.

That disappointing figure last quarter prompted economic officials to downgrade their GDP projections for this year to 6-7%, from 6.5-7.5% previously. The bleaker outlook means the economy is still bound to underperform even as the expected increase in spending is forecast to push up the budget deficit to 9% of GDP this year — a level that, Dominguez said, is already “concerning.”

But S&P was conservative with its projection, penciling in a smaller deficit of 7.5% of GDP in 2021. “However, this should begin to taper off from 2022 as the economy recovers and stimulus measures are scaled back,” it said.

Despite the favorable action, S&P’s decision was not without a warning. In its statement, the debt watcher said it may downgrade the Philippines’ credit rating if the economy’s nascent recovery “falters over the next 24 months.”

On the flip side, a rating upgrade would be possible over the next 2 years if recovery comes much faster than expected, and the government achieves more rapid fiscal stability.