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.
Fitch said while new daily infections were declining from their peak in April, they were still relatively high. The vaccination program that began in March was hampered by supply disruptions, but these were beginning to ease. The authorities aim to vaccinate up to 70 percent of the eligible population by end-2021, which Fitch views as ambitious because under 3 percent of the population was fully vaccinated as of the end of June.
It said fiscal finances weakened, both in absolute terms and against peer medians, as a result of the pandemic. Under Fitch's baseline assumptions, the general government debt-to-GDP was expected to rise to 52.7 percent in 2021 and 54.5 percent in 2022, modestly below the corresponding 'BBB' medians of 57 percent and 58.7 percent.
The rise in the debt ratio from 34.1 percent in 2019 is large and exceeds the median increase for 'BBB' peers. Fitch said it would monitor the evolution of the fiscal deficit and debt levels, as the balance between fiscal consolidation and ongoing government spending to support economic recovery will be an important consideration for the rating.
Meanwhile, the general government deficit widened to 5.4 percent of GDP in 2020 (preliminary official estimates), from 1.7 percent in 2019, driven by increased spending for Covid-19 relief measures and weak GDP growth.
"We expect the GG deficit to widen to 8.8 percent in 2021 due in part to the disbursements of funds carried over from 2020, before narrowing moderately to 6.4 percent in 2022 and 5.6 percent in 2023. Underlying the projections for the general government deficit in 2021 are a central government deficit of 9.5 percent of GDP, and 7.8 percent in 2022, up from 7.6 percent in 2020.
The widening of the central and general government deficits reflects elevated spending by the government to support economic recovery. Our projections also factor in a gradual pick up in revenues from 2022.
"Our forecasts for the budget deficit and public debt assume economic activity picks up over the forecast horizon. Even so, as yet unidentified spending or revenue measures would be required to achieve a level of fiscal consolidation consistent with reducing fiscal deficits towards their pre-pandemic levels. Presidential elections scheduled for May 2022 create some uncertainty around the post-election fiscal and economic strategy. Nevertheless, Fitch assumes broad policy continuity will be maintained given the Philippines' track record and sound medium-term policy framework," Fitch said.
Meanwhile, the Philippines' external finances remain a credit strength. Foreign-currency reserves are high and gross external debt levels are manageable.
"Foreign-exchange reserves rose to $110 billion by end-2020 from about $90 billion in 2019, supported by proceeds from borrowing from multilateral institutions and bond issuances, for pandemic-related spending," it said.
The Philippines' structural indicators remain weaker than peers', including per capita income, governance standards and human development as measured by the World Bank Governance Indicators and UN Human Development Indicators.
The sluggish economic recovery is likely to continue to weigh on the banking system's asset quality and financial performance in the near term, with the industry non-performing loan (NPL) ratio expected by Fitch to rise to nearly 6 percent by end-2021 before improving in 2022.