CREDIT rating agency Moody’s Investors Service yesterday maintained its Baa2 rating with stable outlook on the Philippines, even after seeing a contraction of as much as 2 percent in the country’s gross domestic product growth for this year.
Despite the country’s “robust growth potential,” Moody’s said “weak rule of law and control of corruption weighing on institutional capacity” may provide challenges to the rating.
Moody’s rating, two notches below A-rating level, equals the ratings of Fitch and Korea-based NICE Investors Service.
Christian de Guzman, Moody’s senior vice president, said the country’s credit profile “has been 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. In particular, stringent containment measures have curtailed domestic activity, while the global downturn weighs on the outlook for remittance inflows and goods exports. Structural credit challenges include low per capita income and modest debt affordability,” de Guzman said.
De Guzman 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 will also sharply curtail domestic demand.”
“In addition, the combination of lower revenue resulting from weaker economic growth and higher spending to mitigate its impact will lead to wider government deficits and higher debt,” de Guzman added.
Benjamin Diokno, Bangko Sentral ng Pilipinas governor, said Moody’s opinion “is actually a vote of confidence on the country’s strong macroeconomic fundamentals and the way the Philippine government is managing the coronavirus pandemic.”
“As I said before, the once in a lifetime COVID-19 crisis hit the Philippines from a position of strength. It has ample fiscal and monetary space. While the economy is likely to contract this year, the contraction would be less severe compared to most economies in the world. In fact, barring a second wave of infections, I expect the Philippine economy to have a strong rebound, estimated at 7.8 percent, in 2021,” Diokno said.
Carlos Dominguez, finance secretary, said the opinion validates the resilience of the economy’s most fundamental strengths: a young and productive labor force, a responsible approach to debt management, conservative economic and fiscal policies, and an emphasis on infrastructure and human capital development in the government’s priority programs.
“I also expect that our commitment to fiscal and economic reform, including our comprehensive tax reform program, and our internationally-recognized reputation as a worthy and dependable borrower will keep our credit ratings buoyant,” Dominguez said.
“This vote of confidence in our financial strength is the latest in a string of positive reviews, including one from the highly-reputable The Economist magazine which ranks us as one of the best among emerging economies in terms of financial strength. These reviews demonstrate the international community’s enduring belief in our ability to defeat Covid-19 and bounce back from this pandemic. This confidence will make it easier for us to find the resources and build partnerships that can help resolve this crisis decisively,” Dominguez added.
De Guzman said they 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.”
“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,” de Guzman said.
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.
