Phl credit grade affirmed

S&P expects strong recovery next year

S&P Global Ratings has affirmed its BBB+ credit rating with a stable outlook on the Philippines, citing the country’s ability to rebound strongly following a deep slowdown this year due to the coronavirus disease 2019 or COVID-19 pandemic.

In its latest research update on the Philippines, the debt watcher said it expects the Philippine economy to grow by nine percent next year following a 0.2 percent contraction this year, assuming that the global outbreak is contained.

S&P cited the demand-and-supply shocks caused by the COVID-19 outbreak and domestic containment measures such as the Luzon-wide enhanced community quarantine imposed by the national government since March 16.

The Philippine economy last contracted by 0.5 percent in 1998 due to the Asian financial crisis. In the first quarter, the country’s GDP fell by 0.2 percent, ending 84 straight quarters of growth.

“Although this would mark the slowest economic growth rate since the Asian financial crisis, it is in line with the deep downturn we forecast for the global economy,” S&P said.

Economic managers expect the country’s GDP to contract by two to 3.4 percent this year before bouncing back with a 7.1 to 8.1 percent growth next year.

“Assuming that the pandemic is contained globally by the first half of 2021, we are forecasting the economy will expand by nine percent next year, underpinned by strong growth in investment and exports,” S&P said.

According to S&P, the Philippine economy is among the fastest growing in the world on a 10-year weighted-average per capita basis – a reflection of its supportive policy dynamics and improving investment climate.

S&P expects the country’s budget deficit to rise to a historical high of 7.3 percent of GDP this year before narrowing to four percent next year after launching a four pillar economic strategy worth P1.7 trillion in response to the COVID-19 pandemic.

“Although the economic slowdown will weigh heavily on fiscal and debt metrics over the near term, we expect a meaningful stabilization over the next three to four years owing to strong economic fundamentals and generally orthodox policymaking,” S&P said.

S&P said the proposed Corporate Recovery and Tax Incentives for Enterprises Act or CREATE (formerly CITIRA), which seeks to reduce corporate income tax rate to 25 percent from 30 percent and rationalize foreign investment incentives, would have a supporting effect on the economy over the near term.

The debt watcher also expects the peso to remain stable as the current account balance is likely to book a surplus of 0.5 percent of GDP this year from a deficit of 0.1 percent last year.

It upgraded the country’s credit rating to BBB+ or a notch below the much coveted A scale in April last year, prompting the government to launch its “Road to A” initiative aimed at achieving an A grade by 2022.

Bangko Sentral ng Pilipinas Governor Benjamin Diokno said the country’s quest for an ‘A’ credit rating would have to take a backseat as the government would focus on putting the economy back on high growth trajectory and creating more jobs to improve the lives of Filipinos.

Last May 8, the Philippine received its first downgrade in 15 years after Fitch Ratings lowered the country’s credit outlook to stable from positive.

Since the downgrade in July 2005, the Philippines received 25 favorable actions from debt watchers, bringing the country’s credit rating to BBB+ or just a single-notch below the much coveted A-scale in April last year for S&P as well as to BBB for Fitch and Baa2 for Moody’s Investors Service, both two notches above minimum investment grade, from a junk status in 2005.

Securing an A rating provides significant benefits such as lower borrowing costs for both the government and private entities.