Debt watcher Moody’s Investors Service retained its credit rating and outlook for the Philippines at ‘Baa2 stable’ despite the impact of the coronavirus outbreak that could lead to a 2-percent economic contraction this year.
It said the credit profile of the Philippines was 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.
Bangko Sentral ng Pilipinas Governor Benjamin Diokno said Moody’s retention of the country’s rating and outlook was a “vote of confidence on the country’s strong macroeconomic fundamentals and the way the government is managing the pandemic.”
“While the economy is likely to contract this year, the contraction would be less severe compared to most economies in the world,” Diokno said. “In fact, barring a second wave of infections, I expect the economy to have a strong rebound, estimated at 7.8 percent in 2021,” Diokno said.
Moody’s expects the Philippine economy to contract 2 percent this year, a sharp reversal of the actual 6-percent expansion last year. This is a downward revision from Moody’s previous forecast of a 2.5-percent growth for the Philippines announced in April.
Moody’s said in a credit opinion that the rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices and financial market turmoil were creating severe and extensive economic and financial shock.
The economy contracted by 0.2 percent in the first quarter, a turnaround from the 5.7-percent growth a year ago and 6.4 percent in the fourth quarter of 2020.
Moody’s said the steep GDP decline in the first three months, even as the stringent containment measures under the enhanced community quarantine only became effective over the last few weeks of the quarter.
“As the ECQ will encompass much of the second quarter, we expect high-frequency data to continue to deteriorate despite the implementation of countercyclical policy stimulus, including handouts to vulnerable, low-income households,” it said.
It said growth would also be pressured by weakening external demand. “We also expect remittances to soften substantially, reflecting not only job losses and falling income among overseas Filipinos, but also severely restricted deployment of new workers abroad,” it said.
It said the lower growth and substantial fiscal stimulus would contribute to a higher general government debt burden that was projected to rise to around 45 percent of GDP in the next few years.
Moody’s said that stringent containment measures curtailed domestic activity, while the global downturn weighed on the outlook for remittance inflows and goods exports. Structural credit challenges include low per capita income and modest debt affordability, it said.
It said the global coronavirus outbreak threatens the Philippines through a number of channels, including trade, supply chain linkages, investment, remittances and tourism, while stringent containment measures would also sharply curtail domestic demand.
Moody’s said the combination of lower revenue resulting from weaker economic growth and higher spending to mitigate its impact would lead to wider government deficits and higher debt.
Domestic political developments, such as the administration’s controversial campaign against illegal drugs, also present downside risks to the country’s institutional profile and could hinder the further implementation of reform, it said.
Moody’s said it would consider upgrading the Philippines’ sovereign rating if there was a marked convergence between growth of per capita incomes and government revenue generation, and as a result debt affordability, with higher-rated peers.
It said this could materialize over time as the government makes greater progress on its reform agenda, including addressing infrastructure gaps, increasing competitiveness and the ease of doing business and ensuring sustainable and inclusive growth.
Factors that would prompt a downgrade of the Philippines sovereign rating include the emergence of macroeconomic instability that would lead to a deterioration in fiscal and government debt metrics and/or an erosion of the country’s external payments position.
“The reversal of reforms that have supported recent gains in economic and fiscal strength would also likely lead to a downgrade,” it said.
