MANILA, Philippines — A slow economic recovery and vaccination roll-out would make it hard for the Philippine government to withdraw pandemic-era stimulus, Fitch Ratings said, adding a warning that both a premature shift away from crisis support and retaining measures for too long would be extremely damaging to the economy.
But the Philippines is not alone in this struggle. In a commentary on Friday, the global debt watcher said Vietnam and Indonesia also face the same problem of determining the right timing of reducing support measures for their economy, which would "entail difficult trade-offs for authorities."
“Unwinding policy support could be particularly challenging in countries that are recovering slowly from the pandemic and those with low vaccination rates relative to peers,” Fitch said.
What makes an early withdrawal of pandemic stimulus dangerous is it could send more companies to bankruptcy and push up unemployment rate because the economy still needed more juice to heal from debilitating lockdowns. In the Philippines, the Bangko Sentral ng Pilipinas has done much of the heavy-lifting in powering up the economy: from flooring interest rates to historic-low to lending money to the national government to fund costly coronavirus programs.
On Thursday, the BSP left its key rate unchanged, with Governor Benjamin Diokno saying the central bank will be “patient” for “a few more quarters” as he continued to call an elevated inflation “transitory”, or something that would go away on its own. For monetary authorities, the better-than-expected 7.1% year-on-year growth in the third quarter means “economic growth appears to be gaining solid traction” and any rate hikes at the moment could derail the delicate recovery.
But Fitch said keeping the pandemic stimulus for much too long could lead to “resource misallocation and instigate zombie firms”, or businesses that are just generating enough profits to service debt but cannot pay off these liabilities and fund new projects. Prolonged support could also stoke an increase in government debts as borrowing costs remain cheap.
While the Duterte administration practiced “fiscal restraint” to avoid bloating its budget deficit, Fitch said the Philippines still saw a dramatic increase in public debt because that reluctance to ramp up state spending resulted into “higher drop in (economic) output or increased scarring over the medium term.” In the first half, the debt load accounted for 60.4% of gross domestic product, breaching the 60-percent ceiling recommended by global debt watchers.
And Fitch already sounded the alarm. Back in July, the credit rating agency downgraded its outlook on the Philippines from “stable” to “negative”. This means there are chances that the country’s credit rating — which Fitch kept at investment grade “BBB” — could be downgraded over the next 18 to 24 months if public debt sustained their dizzying rise while the economy takes long to recover.
“The timing of support withdrawal can thus, significantly affect a country’s debt trajectory over the medium term and, hence, a sovereign’s credit profile,” Fitch said.
On the flip side, Fitch said countries with high vaccination rates and those able to open up their service sectors and resume international travel in a phased manner are likely to be able to more quickly withdraw support. So far, the Philippines has fully vaccinated around 30% of its population and is set to welcome back international tourists for leisure travels soon.
“The uncertain path of the pandemic will affect all sovereigns, but particularly those with lower vaccination rates,” Fitch said.
“Well implemented structural reforms could form a silver lining from the crisis. Improved medium-term growth prospects are likely to support ratings, especially when the rating sensitivities are focused on the debt trajectory,” it added.