Fitch Ratings revises Philippines’ outlook to negative

Fitch Ratings on Monday maintained its investment grade “BBB” credit rating for the Philippines but revised its outlook to “negative” from “stable”, citing the impact of the prolonged coronavirus pandemic.

“The revision of the Philippines’ outlook to negative reflects 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,” the credit rater said in a statement.

The “negative” outlook means Fitch may downgrade the Philippines’ credit rating if it reverses reforms or departs from the prudent macroeconomic policy framework that leads to continued higher fiscal deficits. A weaker macroeconomic outlook over the medium-term and “diminishing policy credibility may also lead to a downgrade.

“Fitch believes there are 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,” it said.

The credit watcher said the pandemic weakened the country’s fiscal position both in absolute terms and in comparison to its peer medians. The Philippines’ general government debt-to-GDP ratio is expected to reach 52.7% and 54.5% in 2021 and 2022, much higher than the 34.1% in 2019 and will exceed the median increase for BBB-rated peers.

“Fitch will 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,” it said.

Fitch expects gross domestic product (GDP) to grow by 5% and 6.6% in 2021 and 2022, lower than previous than April estimates which were at 6.3% and 8.3%, respectively. Both projections are also below the 6-7% and 7-9% targets set by the government for the 2021 and 2022, respectively.

While there are already signs of economic recovery, Fitch also flagged the relatively high coronavirus infections.

It also described the government’s target to vaccinate up to 70% of the eligible population by end-2021 as “ambitious,” given only less than 3% of the population have received two jabs as of end-June.

The upcoming 2022 elections will pose some uncertainty regarding fiscal and economic strategy under a new administration, Fitch said. “Nevertheless, Fitch assumes broad policy continuity will be maintained given the Philippines’ track record and sound medium-term policy framework,” it added.

It also warned that the impact of the Supreme Court decision commonly known as the Mandanas ruling – which will increase revenue transfers to local government units from the national government – also poses uncertainty on the fiscal front.

“Poor execution could lead to underspending by local governments, which the authorities are seeking to address through capacity building,” it said.
Fitch said a deterioration in foreign currency reserves, net external debt, and current account deficit could be factors for a downgrade as these would lower the Philippines’ resilience to economic shocks.

Meanwhile, the government’s economic managers welcomed Fitch’s rating affirmation for the Philippines, noting that other economies have faced downgrades due to the pandemic.

The Philippines has kept the “BBB” rating, which is one notch above the minimum investment grade, since December 2017.

“Although the negative impact of the pandemic on the Philippines has been significant, this will only be temporary. We expect to head back to the road of fiscal consolidation once the virus is contained and public spending normalizes to pre-COVID levels” Finance Secretary Carlos G. Dominguez III said in a statement.

Mr. Dominguez said they expect strong growth in the second quarter on the back of vaccine rollout and economic recovery measures.

“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,” Bangko Sentral ng Pilipinas Governor Benjamin E. Diokno said.

The government is aiming to secure an “A” long-term credit rating by 2022.

In May, S&P Global Ratings retained its “BBB+” rating with a “stable” outlook for the country, citing its expectation of a healthy economic recovery will allow the Philippines to return to a better fiscal standing.

In July 2020, Moody’s Investors Service affirmed its “Baa2” credit rating with a “stable” outlook, noting the country’s “strong fiscal position” will be its shield from the impact of the crisis.