FITCH Ratings on Monday affirmed the Philippines’s investment grade rating as the international credit watcher remained optimistic economic recovery prospects for this year up to 2021 amid the deep contraction in 2020.
In its statement, Fitch Ratings said the affirmation of the Philippines’s “BBB” rating balances the government’s modest debt levels relative to peers, its robust external buffers and the still-strong medium-term growth prospects despite the “deep pandemic-induced economic contraction” against relatively low per capita income levels and indicators of governance and human development compared to peers.
On top of that, Fitch also assigned a “stable” outlook to the rating, which means that the investment rating is expected to hold in the next 12 to 18 months.
Economic managers welcomed Fitch’s assessment, saying calling the move a “vote of confidence” for the Philippine economy’s strength, especially since the credit watcher had downgraded many other jurisdictions in recent months.
“In a sea of downgrades, Fitch Ratings kept the Philippines investment credit rating of BBB with a stable outlook. This is a vote for confidence for the country’s fiscal situation amid the Covid-19 crisis,” Bangko Sentral ng Pilipinas (BSP) Governor Benjamin Diokno told reporters.
“Since last year, Fitch has implemented 51 downgrades among 33 sovereigns. We appreciate Fitch’s understanding of Philippines’s credit and macroeconomic direction amid the global pandemic,” he added.
For his part, Finance Secretary Carlos G. Dominguez III said, “The affirmation of the Philippines’s ‘BBB’ rating with a ‘stable’ outlook shows that the country has remained credit- and investment-worthy throughout the global Covid-19 crisis.”
For 2020, Fitch projected economic contraction to have hit 8.5 percent on average as efforts to contain the virus severely affected private consumption and investment.
However, the credit watcher said it expects economic activity in the country to recover in the coming quarters, and projected gross domestic product (GDP) to expand by 6.9 percent in 2021 and 8 percent in 2022.
“New daily recorded Covid-19 cases have been declining in recent months, reflecting an effective government response to the crisis and reducing the risk of renewed lockdowns. The authorities have also engaged in multilateral initiatives and with several pharmaceutical companies to secure vaccines, with a rollout expected to start in May 2021,” Fitch said.
“The potential for a delay poses downside risks to our growth forecasts, while an effective vaccine rollout could result in a faster-than-expected recovery in growth,” it added.
Strong monetary position
Fitch Ratings noted the strong BSP policy cut in 2020 by a cumulative amount of 200 basis points as driven by unusual circumstances of the pandemic. This, the credit watcher believes, will be temporary.
“We think space for further rate cuts is very limited in 2021. Inflation on average was 2.6 percent in 2020, staying within the BSP’s target range of 2 percent to 4 percent,” Fitch said.
The credit watcher also estimated that the current account balance of the country has reverted to surplus in 2020 as the loss of export earnings and tourism receipts was largely offset by lower imports and “surprisingly resilient remittance inflows.”
Fitch said the BSP’s ability to maintain a high level of gross international reserves (GIR)— which hit record highs in 2020—remains a credit strength for the economy.
Favorable fiscal position
Fitch also noted the stable fiscal space for the country due to its relatively low government debt ratio, lower than the median level for BBB-rated economies.
“The Philippines entered the crisis with robust public finances, given its relatively low general government debt ratio of 34.1 percent of GDP in 2019 [BBB median: 42.2 percent]. The pandemic shock has eroded this strength, as we estimate the debt ratio to have risen to 48 percent of GDP in 2020, and anticipate it will rise further and peak at around 55 percent in 2022 [against a projected BBB median of 56.6 percent],” Fitch said.
“Fitch will monitor the post-pandemic evolution of the fiscal deficit and debt levels, as the balance between fiscal consolidation and ongoing government spending to support economic growth will be an important consideration for the rating over the medium term,” it added.
The credit watcher’s forecast is for the Philippines’s general government deficit to have widened to 6.9 percent of GDP in 2020 from 1.2 percent of GDP in 2019. They project the deficit to widen further to 7.7 percent in 2021, before narrowing to 6.6 percent in 2022.
“Our forecasts for the budget deficit assume a gradual pick-up in economic activity over the forecast horizon and continued adherence by the authorities to their prudent approach to macroeconomic policy-making,” Fitch Ratings said.
“Downside risks could stem from presidential elections scheduled in May 2022 that create some uncertainty regarding the post-election fiscal strategy, or from weaker-than-expected economic growth in the aftermath of the health crisis that could make fiscal consolidation more challenging,” it added.
Ratings risks
While the Philippines’s BBB rating was given a stable outlook, Fitch warned that a rundown in public finances, macroeconomic stability and external position deterioration will lead to an eventual downgrade.
In particular, Fitch said the Philippines should guard against a sustained rise in the debt-to-GDP ratio that may come from reversal of reforms, failure to resume historically high economic growth rates after the coronavirus shock subsides, and deterioration in external indicators, including foreign-currency reserves, the current-account deficit and net external debt, which lowers the resilience of the economy to shocks.
On the other hand, sustained broadening of the government’s revenue base that enhances fiscal finances and strengthening of governance standards could eventually lead to a rating upgrade for the country.
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