Despite a credit rating agency issuing a negative outlook on the country, the government’s economic managers say the drag to the economy due to the coronavirus disease 2019 (COVID-19) pandemic will only be temporary.
On Monday, international debt watcher Fitch Ratings said it affirmed the Philippines’ credit rating at “BBB” which is one notch above the minimum investment grade.
Fitch’s outlook on the rating was adjusted from stable to negative, “reflecting downside risks to the Philippines’ medium-term growth prospects and possible challenges associated with unwinding the exceptional policy response to the health crisis and restoring sound public finances as the pandemic recedes.”
Benjamin Diokno, Bangko Sentral ng Pilipinas (BSP) governor, 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.”
“We expect the drag caused by COVID-19 on the economy to be transitory. 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.
But Diokno stressed that they do recognize there are risks to the country’s growth outlook.
“However, our solid fundamentals and ongoing reform initiatives should carry us through toward a solid rebound — to a state that is well-calibrated to the emerging new economy,” Diokno said.
“On the part of the BSP, we are helping realize this through our long list of COVID-response measures, including monetary actions that have helped maintain liquidity in the financial system at a critical time. We will continue to support the economy as needed, mindful of the negative consequences of premature disengagement of our response measures,” Diokno said.
Carlos Dominguez, finance secretary, said the economy is “en route to a solid recovery path and is seen to have posted double-digit growth in the second quarter of this year amid the fast-track 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. 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,” Dominguez said.
In its report, Fitch said it expects full-year growth of 5.0 percent in 2021. It projects growth will strengthen to 6.6 percent in 2022 and 7.3 percent in 2023, before moderating towards its current assessment of potential growth in the 6 to 6.5 percent range.
On the fiscal front, Fitch affirmed that Philippine authorities have continued to make progress in passing the remaining tax reform packages of the comprehensive tax reform program.
“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 (GDP), 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.
Karl Chua, socioeconomic planning secretary, said Fitch’s affirmation of the rating “is a vote of confidence in the country’s economic and fiscal management despite the worst effects of the pandemic.”
“The negative outlook flags the risks that we are aware of, and the economic team will continue to exert effort to open the economy safely, manage risks from COVID, accelerate vaccine deployment, prudently use fiscal resources, and enact the remaining economic and fiscal reforms to further improve growth prospects,” Chua said.
Fitch said preliminary estimates show the country’s general government deficit widened to 5.4 percent of GDP in 2020 from 1.7 percent in 2019, driven by increased spending for COVID relief measures and weak GDP growth.
It expects this 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.
It also projects general government debt-to-GDP to rise to 52.7 percent and 54.5 percent in 2021 and 2022, respectively, still lower than the corresponding medians of 57.0 percent and 58.7 percent among “BBB” countries.
Nicholas Mapa, ING Bank senior economist, said if the trends continue, “we could see other ratings agencies follow suit in the next 3 months with a possible downgrade by year end if fiscal metrics worsen further.”
Fitch’s action came after S&P Global affirmed last May the Philippines’ “BBB+” rating with a stable outlook. The country’s rating with S&P is one step higher than that of Fitch. The stable outlook indicates that the upside and downside risks to the rating are balanced and that the rating is unlikely to change within the short term.
Moody’s, another international debt watcher, assigned a “Baa2” rating to the Philippines, with a stable outlook. Moody’s rating is on par with Fitch’s’ rating.
“The outlook revision reflects the growing attention ratings agencies are likely giving to the protracted rise in Philippine debt while recognizing 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.
