Debt watcher Fitch Ratings on Thursday affirmed the Philippines’ investment grade score of ‘BBB’ with a negative outlook, saying real gross domestic product growth may reach 6.8 percent in 2022 despite external headwinds such as rising interest rates and higher commodity prices.
Fitch said in a report the ‘BBB’ rating balances strong growth, external finances and a credible economic policy framework against lagging structural indicators, including per capita income and governance, relative to peers.
“The negative outlook reflects risks to the Philippines’ medium-term growth prospects, fiscal adjustment path and external buffers in an environment of higher interest rates, weaker external demand and higher commodity prices,” it said.
“We forecast real GDP growth of 6.8 percent in 2022 on strong domestic demand, reflecting normalization of economic activity after the pandemic and the government’s investment program,” it said.
GDP grew 7.8 percent in the first half, surpassing the target range of 6.5 percent to 7.5 percent set by the government.
Fitch said its growth forecast this year considered a slowdown from the second half amid monetary tightening, high imported inflation and weaker global demand. It said the output would exceed pre-pandemic levels in the second half and would be close to potential performance.
“Output growth is likely to slow to 5.5 percent in 2023 before recovering to 6.2 percent in 2024. Downside risks include global growth falling below Fitch’s forecasts of 1.7 percent in 2023 and 2.8 percent in 2024, or the Philippine central bank raising policy rates beyond our assumption of 5.25 percent,” it said.
It said growth risks would stem from potential economic scarring from the pandemic, in particular, due to learning losses.
“Lower public-sector investment, as envisaged under the government’s fiscal program, may slow one of the key tailwinds to growth in recent years,” it said.
“However, this could be offset by higher private investment, which the government is targeting, and the investments could yield growth dividends not accounted for in our forecasts,” it said.
Fitch expects the general government deficit to narrow to 4.3 percent of GDP in 2022 and 2.4 percent of GDP by 2024, from 4.8 percent of GDP in 2021. It said this would be consistent with a narrowing of the budgetary central government deficit to 8.0 percent of GDP in 2022 and 6.3 percent of GDP by 2024, from 8.7 percent of GDP in 2021.
Fitch also expects inflation to average 5.5 percent in 2022, fueled by higher commodity prices and currency depreciation. The moderation of these factors could slow inflation to 3.5 percent in 2024.
“Nevertheless, the medium-term inflation outlook is subject to considerable risk, with September consumer prices up 6.9 percent year on year, well above the central bank’s 4 percent target, and core inflation up 4.5 percent year on year,” it said.
Fitch said the Bangko Sentral ng Pilipinas’ inflation-targeting framework remained credible and it expects rates to rise further, potentially beyond its assumption of 5.25 percent by end-2022, if domestic inflationary pressure continues to build.
The BSP so far adjusted its policy rate by 225 bps in 2022 to 4.25 percent, including an out-of-cycle increase of 75 bps in July.