Moody’s affirms Philippines above minimum investment grade

MANILA, Philippines — Moody’s Investors Service yesterday affirmed its Baa2 rating – a notch above minimum investment grade – and stable outlook for the Philippines as the challenging global credit conditions are not expected to derail the country’s recovery from the impact of the COVID-19 pandemic.

Although the severity of the pandemic shock has led to an erosion in the rating agency’s assessment of economic strength, the debt watcher said it sees sufficient momentum to support real gross domestic product (GDP) growth projection of 6.6 percent for 2022 and 6.2 percent for 2023 as price pressures are set to moderate as commodity prices ease from peaks recorded earlier this year.

After exiting the pandemic-induced recession with a GDP expansion of 5.7 percent in 2021 from a contraction of 9.6 percent in 2020, the Philippines booked a GDP growth of 7.8 percent in the first half of the year despite the slowdown in the second quarter.

Economic managers comprising the Cabinet-level Development Budget Coordination Committee penned a lower GDP growth target of 6.5 to 7.5 percent for this year and 6.5 to eight percent starting next year up to 2028.

“The rating action is driven by Moody’s view that the challenging global credit conditions will not derail the Philippines’ ongoing recovery from the coronavirus pandemic,” Moody’s said.

It added that the continued policy orthodoxy and commitment to reform amid political transition would help assure gradual fiscal repair following the reversal in the government’s fiscal and debt metrics resulting from the pandemic.

“The Philippines also retains fundamental strengths with regards to the stability of its banking system and the capacity to meet external debt repayments, notwithstanding cyclical pressures on the balance of payments and consequent exchange rate depreciation,” it added.

According to Moody’s, the rebound in economic activity since mid-2021 has been strong and is likely to be resilient to the current challenges posed by the turn in global credit conditions over the near-term.

The debt watcher said the Philippine economy is not significantly exposed to Russia, although the European Union has historically been an important source of investment and demand for the country’s goods and services exports.

It added the country is less dependent on external demand as compared to Asia-Pacific peers given its relatively large domestic market, supported by stable remittance inflows from overseas Filipinos.

Over the long term, Moody’s continues to view the Philippines as characterized by higher economic growth relative to most Baa-rated peers, with favorable demographics balanced against a heightened susceptibility to environmental risks given the high incidence of climate-related shocks.

“However, strict and prolonged pandemic containment restrictions contributed to a delayed recovery from the coronavirus shock, in turn leading to severe economic scarring – as represented by one of the largest cumulative economic output losses among rated sovereigns – and a deterioration in Moody’s assessment of economic strength,” it said.

The debt watcher added that other manifestations of economic scarring, especially in relation to the impact of the prolonged shuttering of schools during the pandemic and the reversal of the gains in poverty reduction, have the potential to curtail potential growth over the long-term if left unaddressed.