Fitch retains PH’s BBB rating, stable outlook

Fitch Ratings on Monday retained the Philippines’ investment grade credit rating of BBB with stable outlook, citing the country’s manageable fiscal situation despite the impact of the coronavirus disease 2019 (Covid-19) pandemic.

“The affirmation of the Philippines’ ‘BBB’ rating and Stable Outlook balances modest government debt levels relative to peers, robust external buffers and still-strong medium-term growth prospects, notwithstanding the deep pandemic-induced economic contraction, against relatively low per capita income levels, and indicators of governance and human
development compared to peers,” the credit rating agency said in a statement.

Fitch Ratings said that while the economic impact of the pandemic to the Philippines in 2020 was more significant than it had previously expected, the economy is expected to recover in 2021 and 2022.

The county’s gross domestic product (GDP) is projected to contract by 8.5 percent in 2020.
“We expect economic activity to continue to recover in the coming quarters, and project GDP to expand by 6.9 percent and 8.0 percent in 2021 and 2022, respectively,” said Fitch Ratings, adding that the decline in Covid-19 cases reflect an effective government response and reduces the risk of new lockdowns.

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Need for vaccine roll out

“The authorities have also engaged in multilateral initiatives and with several pharmaceutical companies to secure vaccines, with a roll out expected to start in May 2021,” it added.

Fitch, however, said that the potential for a delay poses downside risks to its growth forecasts, while an effective vaccine roll out could result in a faster-than-expected recovery in growth.

Government deficit is seen to reach 6.9 percent of GDP in 2020; 7.7 percent in 2021; and 6.6 percent in 2022.

“Underlying the projections for 2021 are a central government deficit of 8.7 percent of GDP, up from an estimated 7.5 percent of GDP in 2020, as government expenditure aimed at supporting economic recovery is likely to remain high. The wider deficits reflect the authorities’ policy response to Covid-19 under their four-pillar socio-economic strategy,” it said.

“Our forecasts for the budget deficit assume a gradual pick-up in economic activity over the forecast horizon and continued adherence by the authorities to their prudent approach to macroeconomic policymaking. Downside risks could stem from presidential elections scheduled in May 2022 that create some uncertainty regarding the post-election fiscal strategy, or from weaker-than-expected economic growth in the aftermath of the health crisis that could make fiscal consolidation more challenging,” Fitch Ratings added.

According to Fitch, the country’s debt ratio likely rose to 48 percent of GDP in 2020 and will further rise to 55 percent in 2022.

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Fitch said it will monitor the post-pandemic evolution of the fiscal deficit and debt levels, as the balance between fiscal consolidation and ongoing government spending to support economic growth will be an important consideration for the rating over the medium term.
Infrastructure spending is projected to reach 4.5 percent of GDP in 2020 and 5.9 percent in 2021.

Fitch said the projections incorporate the impact of the passage of the Corporate Recovery and Tax Incentives for Enterprises Act (Create), package 2+ Sin Taxes, and the medium-term fiscal strategy, which seeks to reduce the central government deficit to 7.3 percent of GDP by 2022.

“According to the authorities, revenue loss from the senate version of Create is projected to be about P133.2 billion and P117.6 billion in 2021 and 2022, respectively, or about 0.6% of annual GDP on average. However, Create also includes rationalisation of fiscal incentives that aim to establish a more competitive and level-playing field for businesses, which could improve the business environment,” it said.

Fitch said the presidential election next year could cause uncertainty about economic policies but the medium-term fiscal framework is seen to remain intact.

Role of central bank

It added that ongoing recourse to direct central bank financing of the budget deficit beyond the immediate needs of the health crisis could also undermine investor confidence and financial stability by raising questions about the independence of monetary policymaking.
Fitch said the current account is estimated to have reverted back to surplus last year on the back of lower imports and resilient remittance flows.

“The Philippines’ external finances remain a credit strength. Foreign-currency reserves remain high and gross external debt levels are manageable. Foreign exchange reserves are estimated to have increased to about $105 billion by end-2020 from $90 billion in 2019, supported by proceeds from global bond issuances and disbursements from multilaterals for pandemic-related spendin,” it said.

“We expect reserve coverage of current external payments (CXP) to remain strong in 2021 and 2022 at about 9-10 months. Modest external debt service payments relative to its foreign currency reserves support a strong external liquidity ratio of about 387 percent (measured as liquid external assets/liquid external liabilities), compared with a median of 167.8 percent for ‘BBB’ rated peers,” it added.

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Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno, meanwhile, said he also appreciates “Fitch’s understanding of the Philippines’ credit and macroeconomic direction amid the global pandemic we are all facing.”

He cited the BSP’s move to cut policy rates and other measures to help ensure liquidity and efficient functioning of the financial system amid the pandemic.

“We implemented a long list of response measures, including unprecedented ones—such as counting of loans to micro, small, and medium enterprises (MSMEs) as part of compliance with the reserve requirement—in a manner that was prompt and decisive. Given that the BSP, along with the rest of government, did its homework last year, we can see better days ahead as we look forward to the distribution of anti-Covid vaccines in the country,” said Diokno.

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Article and Photo originally posted by Manila Times last January 12, 2021 and written by Anna Leah E. Gonzales. Minor edits have been made by REBPH to cater to its own readers.

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