Fitch: Macro policy performance key tests for incoming administration

MANILA, Philippines — Fitch Ratings says macro policy and performance are the key tests for the administration of presumptive president Ferdinand “Bongbong” Marcos Jr. amid the headwinds the Philippines is facing.

In a commentary, the debt watcher said the clear mandate delivered by the May 9 election bodes well for the ability of the incoming Marcos administration to implement its agenda that is broadly in line with existing policies of the Duterte government.

Last February, Fitch affirmed the country’s BBB credit rating and negative outlook.

“We foresee the government maintaining a focus on infrastructure investment, which is a key element of the country’s favorable medium-term growth prospects that support the sovereign’s BBB rating. Our baseline assumption is for the Philippines to continue with its sound policy framework and return to strong medium-term growth following the COVID-19 pandemic,” Fitch said.

The credit rating agency explained that its negative outlook on the Philippines reflects the uncertainty around this outcome, as well as possible challenges in bringing down government debt after the pandemic policy response.

“Risks to growth posed by pandemic-related scarring could be offset by investment that addresses infrastructure shortfalls, supporting the country’s growth potential. However, investment efficiency is critical,” Fitch said.

It warned that a deterioration of governance standards could, over time, dilute the positive effect of investment on productivity growth, while poorly managed public infrastructure investment could also contribute to government debt rising faster than nominal gross domestic product (GDP) over the medium term.

Fitch cited the country’s rising inflation that could prompt the Bangko Sentral ng Pilipinas (BSP) to raise interest rates in the second half of the year.

According to Fitch, it remains unclear how the 2018 Supreme Court ruling requiring increased revenue transfers from the central government to local government units starting 2022 would affect public spending efficiency.

It said that poor execution could lead to underspending by local governments and could adversely affect medium-term growth potential, with the net credit effects likely to be negative.

Furthermore, it said amendments to the Rice Tariffication Law under the new administration could curb rice imports, push up the cost of rice, and hurt tax revenue.

“The low tax take is a credit weakness for the Philippines, and when we affirmed the rating in February, we noted that a reversal of tax reforms that leads to sustained higher fiscal deficits could result in a rating downgrade,” Fitch warned.

The debt watcher said it would be able to better assess the impact of the Marcos government’s policy agenda once key appointments are finalized, notably within the economic team.

The incoming president’s capacity to implement legislation will also hinge on dynamics within the new congress. Results of the congressional elections have yet to be confirmed, but we anticipate that the body will not pose a major obstacle to the eventual passage of the president’s legislative agenda,” it said.

Despite a modest weakening of the peso and rising pressure on the goods trade balance in recent months amid higher global energy prices, Fitch expects external buffers to remain a credit strength for the Philippines,

“A gradual reopening of the economy to tourists in the wake of the pandemic should support the country’s external position this year,” Fitch said.

The country’s gross international reserves (GIR) level stood at $106.76 billion in April from $107.31 billion in March. The BSP Monetary Board is expecting a smaller foreign exchange buffer of $108 billion instead of $112 billion for this year, and $109 billion for next year after hitting a record level of $110.12 billion in 2020.