Nomura warns of credit rating downgrade

MANILA, Philippines — Japanese investment bank Nomura said the likelihood of the Philippines getting a credit rating downgrade from Fitch Ratings may rise after the elections.

In a report, Nomura chief ASEAN economist Euben Paracuelles and analyst Rangga Cipta said the decision of Fitch to retain the BBB or one notch above minimum investment grade and negative outlook of the Philippines last week could pave the way to a downgrade soon.

“The decision to maintain the negative outlook is consistent with our view that the likelihood of a credit rating downgrade by Fitch could rise after the elections in May, owing to the weak economic recovery, the risk of scarring effects, and uncertain prospects for the medium-term path of fiscal consolidation, given the election cycle,” Paracuelles and Cipta said.

In July last year, the debt watcher revised the credit rating outlook of the Philippines to negative from stable due to the impact of the pandemic.

“Fitch indicated the negative outlook reflects uncertainty about medium-term growth prospects, as well as possible challenges in unwinding the policy response to the health crisis and bringing government debt on a firm downward path,” Nomura said.

It said Fitch has raised broadly similar concerns that were raised last year, including the fiscal deficit reduction to 4.9 percent of gross domestic product (GDP) this year from 8.7 percent in 2020.

On Feb. 17, Fitch affirmed the investment grade BBB rating of the Philippines, but flagged downside risks to the economic recovery from potential pandemic-related scarring effects as well as post-election uncertainty.

Fitch slightly upgraded the country’s 2022 gross domestic product (GDP) growth forecast to 6.9 percent from the original target of 6.8 percent after the economy bounced back with a 5.6 percent expansion last year from a 9.6 percent contraction in 2020 during the height of the global health crisis.

The latest projection of Fitch is slightly below the seven to nine percent GDP growth target set by the Development Budget Coordination Committee (DBCC) for this year after the five to 5.5 percent target was surpassed last year.

“This should be supported by a pick-up in vaccination rates, falling COVID infection numbers, normalized economic activity – particularly in services – after tight containment measures in 2020 and part of 2021,” Fitch said.

For 2023, the credit rating agency slightly lowered its GDP growth forecast to seven instead of 7.1 percent.

“Downside risks to the economic recovery stem from potential pandemic-related scarring effects on medium-term growth prospects and the risk of further COVID-19 waves from new variants,” Fitch said.

Likewise, it said the national elections also create some level of uncertainty around the post-election fiscal and economic strategy.

“We assume broad policy continuity will be maintained given the Philippines’ record of a generally sound policy framework,” it said.