THE Philippines’s credit rating is expected to remain unchanged in the next 12 to 18 months, after Moody’s Investors Service on Tuesday affirmed the country’s Baa2 credit profile.
The country kept its Baa2 credit rating with stable outlook despite economic challenges brought about by the coronavirus disease 2019 (Covid-19), Moody’s said.
“The Philippines’s credit profile has been characterized in recent years by strong economic performance, a strengthening fiscal position and limited vulnerability to external shocks, although the global coronavirus outbreak presents near-term challenges to these trends,” Moody’s said.
The debt watcher said the country’s rating was based on its “a3” economic strength, “baa2” institutions and governance strength, “ba1” fiscal strength and “baa” susceptibility to event risk.
Moody’s decision to keep the Philippines’s credit rating mirrors Fitch’s earlier revision of its credit rating outlook of the country from “positive” to “stable.”
“Moody’s expects the Philippines’s real GDP [gross domestic product] growth to remain robust relative to peers and that its fiscal metrics will continue to strengthen as the government continues to make progress on its socioeconomic reform agenda, particularly on tax reform,” the agency said.
However, the credit-rating firm said that GDP might contract by 2.5 percent this year. It maintained its inflation projection at 2.2 percent for 2020.
The Philippine Statistics Authority (PSA) recently reported that the economy contracted by 0.2 percent in the first quarter—the first since 1998—while inflation stood at 2.6 percent year-to-date.
The pandemic, Moody’s said, is putting trade, supply chain linkages, investment, remittances and tourism at risk and the lockdown is not helping either because it is curtailing domestic demand.
“In addition, the combination of lower revenue resulting from weaker economic growth and higher spending to mitigate its impact will lead to wider government deficits and higher debt,” Moody’s said.
The Bureau of the Treasury said the national government booked a narrower budget deficit at P74 billion in the first quarter, 17.97 percent down from P90.2 billion a year ago, as spending fell below target.
Dominguez, Diokno: vote of confidence
Finance Secretary Carlos G. Dominguez III called Moody’s credit opinion a “vote of confidence” in the country’s financial strength.
“The recent credit opinion by the international benchmarker Moody’s validates the resilience of our most fundamental strengths: a young and productive labor force, a responsible approach to debt management, conservative economic and fiscal policies, and an emphasis on infrastructure and human capital development in our government priority programs,” Dominguez told finance reporters on Tuesday.
The finance chief also expects the Philippines’s credit ratings to remain “buoyant” due to the government’s commitment to fiscal and economic reform, including the comprehensive tax reform program and its internationally recognized reputation as a worthy and dependable borrower.
“This vote of confidence in our financial strength is the latest in a string of positive reviews, including one from the highly reputable The Economist magazine which ranks us as one of the best among emerging economies in terms of financial strength,” he said.
“These reviews demonstrate the international community’s enduring belief in our ability to defeat Covid-19 and bounce back from this pandemic. This confidence will make it easier for us to find the resources and build partnerships that can help resolve this crisis decisively,” he added.
Bangko Sentral ng Pilipinas Governor Benjamin Diokno said Moody’s assessment is a “vote of confidence” in the country’s economic situation amid the global crisis.
“Given the unprecedented collapse of the global economy, the recent Moody’s credit opinion of the Philippines—maintaining its Baa2 stable outlook—is actually a vote of confidence on the country’s strong macroeconomic fundamentals and the way the Philippine government is managing the coronavirus pandemic. As I said before, the once-in-a-lifetime Covid-19 crisis hit the Philippines from a position of strength. It has ample fiscal and monetary space,” Diokno said.
“While the economy is likely to contract this year, the contraction would be less severe compared to most economies in the world. In fact, barring a second wave of infections, I expect the Philippine economy to have a strong rebound, estimated at 7.8 percent, in 2021,” the governor added.
Banking sector
Meanwhile, Moody’s assessed the banking sector risk at “a,” noting that “the Philippine banking system as a whole is well-capitalized, profitable and competently managed, thus posing limited contingent risks to the government.” Earlier, it said that capitalization of the industry will remain stable given that rated local banks have an average common equity Tier 1 capital ratio of 13.7 percent as of end-2019.
Still, the local banking sector was given a negative outlook in April amid pressure on profitability due to the pandemic.
The Bangko Sentral ng Pilipinas (BSP) recently shared that the banking industry might deal with P556.6-billion nonperforming loans this year as the pandemic constrains borrowers’ liquidity. This can drag the overall profits of the sector markedly, if ever.
“We expect the current account deficit to remain narrow and stable in 2020 as the negative impact on exports, tourism, remittances and other services receipts will be offset somewhat by lower oil prices and subdued import demand on account of slower economic growth,” Moody’s added.
Last year, the Philippines’s current account deficit went down by 95 percent to $464 million—0.1 percent of GDP—from $8.8 billion in 2018 on the back of lower trade in goods deficits and higher net receipts in the trade in services, BSP said.
Sought for comment, RCBC Chief Economist Michael L. Ricafort said that robust gross international reserves which signal strong external position and effective monetary policy, that helps in easing inflation, supported the country’s credit rating.
BSP data showed the Philippines’s dollar reserves stood at $89 billion as of end-March, covering nearly eight months’ worth of imports of goods and services and payments of primary income. The Central Bank also recently slashed rates by 50 basis points, bringing overnight repurchase rate to 2.75 percent.
“The country’s improved credit ratings in recent years, at about 2 notches above investment grade, supported by the country’s improved economic and credit fundamentals amid improvements also on fiscal management with fiscal reform measures in place, have helped in the country’s easy access to cheaper financing from the local and international financial markets,” he added.
With Bernadette D. Nicolas
Image credits: Roy Domingo, AP
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