The Philippines has continued to maintain its investment-grade credit ratings despite the global COVID-19 crisis that has led to a wave of rating downgrades across the globe.
International debt watcher Fitch Ratings on Monday announced it affirmed the Philippines’ credit rating at “BBB,” which is one notch above the minimum investment grade. The country has maintained the same rating since December 2017.
The rating affirmation reflects the Philippines’ robust external buffers and projected government debt levels that, while rising, should remain just below ‘BBB’ peer medians. These are balanced against low per capita income levels and indicators of governance and human development compared to peers.
The outlook on the rating was adjusted from “stable” to “negative”. Fitch said the outlook adjustment reflects downside risks to the Philippines’ medium-term growth prospects and possible challenges associated with unwinding the exceptional policy response to the health crisis and restoring sound public finances as the pandemic recedes.
The rating decision from Fitch came after international debt watcher S&P Global affirmed last May the Philippines’ “BBB+” rating with a “stable” outlook. The country’s rating with S&P is one step higher than that of Fitch. The “stable” outlook indicates that the upside and downside risks to the rating are balanced and that the rating is unlikely to change within the short term.
Moody’s, on the other hand, assigns a “Baa2” rating to the Philippines, with a stable outlook. At this level, Moody’s rating is on par with Fitch’s’ “BBB” rating.
In response to Fitch’s latest action on the Philippines, two of the country’s top economic officials said that despite the rating agency’s latest assessment, the Philippines’ economic recovery and strong medium-term growth prospects are on solid footing, supported by the government’s economic recovery measures, the strong economic and fiscal foundation bolstered by years of implementation of reforms, and the government’s commitment to pursue the remaining economic and fiscal measures that will further improve the business environment, help attract more investment and generate more jobs.
Finance Secretary Carlos Dominguez said, “Although the negative impact of the pandemic on the Philippines has been significant, this will only be temporary. In fact, the economy is already en route to a solid recovery path and is seen to have posted double-digit growth in the second quarter of this year amid the fast-track implementation of the vaccine rollout and economic recovery measures. We expect economic growth to range between 6 and 7 percent this year and an even higher 7 to 9 percent next year.”
“These upbeat growth projections take into account the continued relaxation of mobility restrictions, higher spending on COVID response and economic recovery programs, and the faster rollout of the mass vaccination program. We target to achieve ‘population protection’ by having 70 million Filipinos, or 100 percent of our adult population, inoculated by the end of this year,” Dominguez said.
“On the fiscal front,” he said, “while we have significantly augmented the expenditure program to fund massive COVID relief measures, government spending has remained within the boundaries of fiscal discipline and sustainability. National government debt, as a percentage of gross domestic product (GDP), is projected to settle at a still manageable level of 58.7 percent this year. We expect to head back to the road of fiscal consolidation once the virus is contained and public spending normalizes to pre-COVID levels.”
“We continue to look forward to a bright future for the Filipino people, especially as the economic team remains focused on implementing or pursuing the congressional passage of the various packages of President Duterte’s Comprehensive Tax Reform Program (CTRP) this last year of his Administration. For instance, the newly signed Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act is a landmark reform that promises to become the single biggest economic stimulus program for businesses as well as a magnet for more foreign direct investments to the Philippines,” Dominguez said.
For his part, Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno said: “We expect the drag caused by COVID-19 on the Philippine economy to be transitory. The sharp economic contraction last year was caused primarily by strict containment measures to prevent the spread of the virus, save lives and increase the capacity of the healthcare system. When the daily tally of cases showed a sustained decline and the government started to relax the mobility restrictions, the surveys showed the economy was able to generate jobs quickly. “
“As the government accelerates the vaccination program and implements recovery measures, we expect the green shoots of recovery to further strengthen and the economy to return to its robust growth path. Of course, we recognize that there are risks to our growth outlook. However, our solid fundamentals and ongoing reform initiatives should carry us through toward a solid rebound—to a state that is well-calibrated to the emerging new economy,” the BSP Governor added.
“On the part of the BSP, we are helping realize this through our long list of COVID-response measures, including monetary actions that have helped maintain liquidity in the financial system at a critical time. We will continue to support the economy as needed, mindful of the negative consequences of premature disengagement of our response measures. Moreover, our financial digitalization agenda should help move the Philippines to new heights. Faster payments processes and accessibility of financial products and services through digital means will help push economic growth and financial inclusion moving forward,” Diokno said.
In its report, Fitch said it expects full-year growth of 5.0 percent in 2021. It projects growth will strengthen to 6.6 percent in 2022 and 7.3 percent in 2023, before moderating towards its current assessment of potential growth in the 6.0 to 6.5 percent range.
On the fiscal front, Fitch affirmed that Philippines authorities have continued to make progress in passing the remaining tax reform packages of the comprehensive tax reform program. The CREATE tax package, an important tax reform, which came into effect in January 2021 and aims to establish a more competitive level-playing field for businesses, could also aid revenue collections in the future.”
The agency said general government (GG) deficit widened to 5.4 percent of GDP in 2020 (preliminary official estimates), from 1.7 percent in 2019, driven by increased spending for COVID relief measures and weak GDP growth. It expects the GG deficit/GDP to widen to 8.8 percent in 2021 due in part to the disbursements of funds carried over from 2020, before narrowing moderately to 6.4 percent in 2022 and 5.6 percent in 2023.
It projects general government debt-to-GDP to rise to 52.7 percent and 54.5 percent in 2021 and 2022, respectively, lower than the corresponding medians of 57.0 percent and 58.7 percent among “BBB” countries.
Fitch believes the Philippines’ external finances remain a credit strength. Foreign-currency reserves are high and gross external debt levels are manageable. Foreign exchange reserves rose to USD110 billion by end-2020 from about USD90 billion in 2019, supported by proceeds from borrowing from multilaterals and bond issuances, for pandemic-related spending.
The debt watcher further said it believes a majority of the banks continue to be sufficiently capitalized to withstand further stress in the system. It noted that the recently enacted Financial Institutions Strategic Transfer Act (FIST), which allows banks to sell impaired assets to SPVs and amortize any losses from sale by up to five years, could also facilitate faster resolution of non-performing loans (NPLs) and in turn allow the system to embark on a speedier recovery. It expects industry NPLs to increase to 6 percent by end-2021 before improving in 2022.
Since the start of the COVID 19 health crisis early in 2020, 36 sovereigns have been downgraded by Fitch while 31 are on Negative outlook as of June 2021.
Neighboring and rating peer countries of the Philippines that were either downgraded or assigned a negative outlook by Fitch include: Malaysia (from A- to BBB+); Mexico and Italy (from BBB to BBB-); India (from BBB- stable to BBB- negative); and Peru (from BBB+ stable to BBB+ negative).
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