Economist sees Fitch cutting PH credit rating this year amid sluggish recovery

A bank economist on Tuesday warned of a possible downgrade of the Philippines’ investment grade score by credit rating agencies before the end of the year amid the slow economic recovery caused by the prolonged impact of the COVID-19 pandemic.

ING Bank Manila senior economist Nicholas Mapa said in a report the latest move by Fitch Ratings revising the rating’s outlook from “stable” to “negative,” while keeping the “BBB” rating reflected the growing attention ratings agencies were giving to the protracted rise in Philippine debt and the slowing momentum of the economic engines.

“Despite showing some green shoots, the overall growth trajectory is likely less vibrant compared to pre-pandemic levels as consumption remains constrained by high unemployment and investments are held back due to poor sentiment,” Mapa said.

“If trends continue we could see other ratings agencies follow suit in the next three months with a possible downgrade by year end if fiscal metrics worsen further,” Mapa said.

Bangko Sentral ng Pilipinas Governor Benjamin Diokno, however, said the drag caused by COVID-19 on the Philippine economy was expected to be transitory, as 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,” Diokno said.

“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,” Diokno said.

He said solid fundamentals and ongoing reform initiatives should carry the country through toward a solid rebound—to a state that is well-calibrated to the emerging new economy. 

Diokno said BSP would continue to support the economy as needed, mindful of the negative consequences of premature disengagement of its response measures.

Finance Secretary Carlos Dominguez III said the economy was already en route to a solid recovery path and was seen to have posted double-digit growth in the second quarter amid the 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,” Dominguez said.

“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, 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, 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,” Dominguez said.

He said the economic team remained focused on implementing or pursuing the congressional passage of the various packages of President Duterte’s Comprehensive Tax Reform Program this last year of his administration.

Fitch Ratings revised the outlook on the Philippines’ ‘BBB’ credit rating to ‘negative’ from ‘stable’ to reflect the increasing risks to the credit profile from the impact of the pandemic and its aftermath on policy-making as well as on economic and fiscal out-turns.

Fitch said there were downside risks to medium-term growth prospects as a result of potential scarring effects, 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 affirmation reflects the Philippines’ robust external buffers and projected government debt levels that, while rising, should remain just below the median for ‘BBB’ rated peers. These are balanced against low per capita income levels and indicators of governance and human development compared to peers,” it said.

Fitch said the Philippine economy was hit particularly hard by the COVID-19 pandemic and contracted by 9.6 percent in 2020. The pace of economic recovery in 2021 has been set back by new highly transmissible variants and targeted mobility restrictions.

First-quarter gross domestic product shrank by 4.2 percent year-on-year, dragged down by reduced private consumption (-5 percent) and investment (-18 percent).

It said that despite progress in the government’s infrastructure investment program, overall investment fell by 27 percent in 2020, highlighting the impact of the pandemic on the economy and raising concerns about the pace and sustainability of the recovery as restrictions ease.

Unemployment remained high at 7.7 percent as of May, though it improved from last year’s peak of over 17 percent on robust job creation.

“Green shoots of recovery are emerging, facilitated by the fiscal and monetary policy response and the resilience of remittances and exports. Remittances grew by 4.8 percent in the first four months and exports grew by 21.4 percent yoy in the first five months,” it said.

Fitch said full-year GDP growth of 5 percent would be possible in 2021, although this reflects low base effects and was down from its earlier forecasts following the weak first-quarter outturn and resurgence of the virus in March to May this year.

“GDP growth should then strengthen to 6.6 percent in 2022 and 7.3 percent in 2023, before moderating towards our assessment of potential growth in the 6 percent to 6.5 percent range,” Fitch said. 

Topics: ING Bank Manila , COVID-19 , Pandemic , Comprehensive Tax Reform Program , Nicholas Mapa , Benjamin Diokno
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