PHL credit rating hinges on recovery
ECONOMIC output may be down in the first quarter of 2020, but confidence remains high for the Philippine economy, especially after S&P Global Ratings’ most recent move to maintain the country’s credit rating despite global distress due to the pandemic. Bangko Sentral ng Pilipinas (BSP) Governor Benjamin Diokno called S&P’S move a “big vote of confidence” on the post-pandemic economic recovery of the Philippines. Over the weekend, S&P issued a statement, affirming the Philippines’ credit rating at “BBB+” with a stable outlook. A BBB+ rating means the credit rating agency remains fairly confident that the country has the capacity to repay its borrowings and financial obligations. A stable outlook on the rating means the rating is not bound to change in the next 12 to 18 months. The debt watcher said it may upgrade the credit rating of the Philippines in the next two years if the country will have a swift economic turnaround from the devastation wrought by the coronavirus disease 2019 (Covid-19) pandemic. In a statement over the weekend, it said the country’s economy is bound for a strong recovery in 2021 assuming the virus is contained by the first half of next year. “We may raise the rating over the next two years if the economy recovers much more quickly than expected, and the government makes significant further achievements in its fiscal reform program, such that the net general government indebtedness falls below 30 percent of GDP,” S&P said. Its long-term outlook remains stable on the back of normal policymaking seen to support credit metrics and anticipated economic recovery next year. This, as the credit-rating firm expects a substantial drop in budget deficit in 2021. In its assessment, S&P said: “The Philippines’ economy should achieve a strong recovery from 2021, following a deep slowdown due to the Covid-19 pandemic this year. 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.” “The stable outlook reflects our expectations that the Philippines’ economy will achieve strong growth from 2021, and its fiscal deficits will decline meaningfully after a significant rise in 2020,” it added.
Defying downgrade trend
OVER the course of the pandemic, Moody’s Investors Service and Fitch Ratings both already announced they are maintaining the Philippines’ credit rating despite global economic stress. S&P’S announcement completes the move from all three major credit watchers in the world. “The Philippines is defying the global trend of rating downgrades and negative rating outlook as an aftermath of the health crisis and the subsequent containment measures of many governments,” Diokno said on Sunday. Due to the effects of massive economic and travel restrictions, the
Philippine economy contracted by 0.2 percent in the first quarter of the year. This is the country’s first contraction in 22 years. In its report, S&P said it expects the Philippines to remain in negative territory in 2020, with an average GDP contraction of 0.2 percent. For 2021, however, S&P sees the Philippines growing by 9 percent, before normalizing at 6.7 and 7 percent in 2022 and 2023, respectively.
Economic recovery
THE growth will be driven by investment and exports, it added. “The Philippine economy is among the fastest growing in the world on a 10year weighted-average per capita basis—a reflection of its supportive policy dynamics and improving investment climate,” S&P explained. S&P estimates that GDP per capita will reach $3,540 this year. Real GDP per capita growth, meanwhile, is expected to average approximately 4.2 percent annually in 2020 to 2023. It warned, however, that the uncertainty in export markets and “modest, though improving,” transportation infrastructure are dragging the economy. “As such, ongoing work to close infrastructure gaps and improve the business climate through greater political stability and regulatory reforms should be supportive of economic productivity,” the credit assessor said.
Economic managers rejoice
LOCAL economic managers welcomed the decision of S&P. Finance Secretary Carlos Dominguez III said the affirmation of the “BBB+” rating with “stable” outlook is an “unequivocal recognition by S&P of the resilience of the Philippine economy”. “We are confident that our government’s four-pillar strategy to deal with the pandemic will see us through this global health emergency as we remain focused on saving lives and protecting communities while gradually lifting mobility restrictions to restart the economy and get people back to work,” Dominguez said. The government has launched a fourpillar socioeconomic strategy in response to the Covid-19 pandemic, worth about P1.7 trillion or approximately 9.1 percent of GDP. This includes support to vulnerable groups and individuals, additional resources for frontline medical workers, as well as a slew of ad hoc fiscal and monetary measures. With this, S&P expects the general government deficit to widen to a historical high of 7.3 percent of GDP in 2020, which will push the net general government debt stock to almost 35 percent of GDP, a level not seen since 2010. Nevertheless, S&P notes that this level of indebtedness is lower than the Philippines’ international peers’.
Strong fundamentals
ACTING National Economic and Development Authority (Neda) Secretary Karl Chua said, meanwhile, that while no country has been spared from the economic effects of this global pandemic, the Philippines’ strong economic fundamentals and inclusive recovery measures “will power our return to growth.” Chua added: “Thanks to our ample buffers and fiscal space, we can jumpstart domestic demand by investing more in healthcare, infrastructure and the entire food value chain.” S&P said in its report that the Philippine economy’s constructive trajectory is underpinned by strong household and company balance sheets, sizable inward remittance flows, and an adequately performing financial system. “Prior to the outbreak of Covid-19, the country’s unemployment rate had been declining for a few years, signaling the economy’s strengthening labor market even as the working-age population continued to grow,” S&P said. For the part of the BSP, Diokno said critical institutional reforms and sound policy management gives them the advantage of having ample monetary space to carry out further easing, if necessary. “While being mindful of our price and financial stability mandates, we are thinking outside the box to enact policies that ultimately help safeguard the lives and livelihoods of our people. Such is our solemn responsibility in this once-in-alifetime crisis, and I am confident that our approach will demonstrate the resilience of our country,” Diokno said. S&P in its report also hailed the fact that the local banking sector remains largely deposit-funded, with high liquidity and limited linkage to global markets.