Uncontrolled COVID-19 spread poses credit risk — Moody's
MANILA, Philippines — The risk of coronavirus pandemic completely spinning out of control and resulting into larger spending costs is now seen as a crucial determinant of the Philippines’ well-prized investment-grade rating, Moody’s Investors Service said on Friday.
While the second-quarter’s record-breaking economic slump fell within expectations, Christian de Guzman, vice-president at Moody’s Sovereign Ratings Group, said the debt watcher is now keeping a close look on whether the country will get a good handle of the pandemic.
“Our view of the Philippines’ creditworthiness continues to emphasize the favorable prospects for the stabilization and eventual reversal of the projected deterioration in fiscal and debt metrics due to the pandemic shock,” De Guzman said in an e-mail.
“The primary risk to that view is whether the coronavirus infection can be effectively brought under control,” he added.
This essentially means that the risk of the virus’ uncontrolled spread is tied to the Duterte government’s worsening budget position. In July, when Moody’s affirmed its Baa2 investment-grade rating for the Philippines, the debt watcher warned against persistent “local transmission” that in the long run effectively raises government costs.
On Thursday, when economic managers released a third set of macroeconomic projections since May, Moody’s fears appeared to be slowly showing. Under the July 28 projections, revenues are seen to plummet nearly 20% from year-ago levels, while the budget deficit, originally wanted controlled below 9% of gross domestic product (GDP), is now seen to hit 9.6% this year before slowly narrowing to 7.5% by 2022.
Last May 27, revenues were only seen to sink 16.7% year-on-year, with the deficit kept at 8.4% of GDP in 2020, going down to 5% of GDP in 2022.
Spend big now or save for later?
This has implications in fiscal policy. On Thursday, Finance Secretary Carlos Dominguez III reiterated his hardline stance against a larger stimulus, saying there is a need to save up ammunition and likening the pandemic response to a boxing training for a 12-round match.
But Nicholas Antonio Mapa, senior economist at ING Bank in Manila, said there is no need for 12 rounds if “we can find an opening for a knockout punch” with an early massive spending.
“This is not the time to hold our punches, regardless if we're scheduled to go 12 rounds. If we have a chance to knock out our opponent in the early round, then we should,” Mapa said in an online exchange.
For Moody’s, De Guzman said the sharp GDP contraction highlights the “downside risks to our current forecasts for the Philippine economy and the government’s fiscal position.” In July, Moody’s projected the Philippine economy would fall by 4.5% annually in 2020.
"Pending the effectiveness of the recently reimposed MECQ (modified enhanced community quarantine), we do believe that real GDP growth did reach a trough in the second quarter, but that that recovery over the second half will be somewhat more subdued that previously assumed," he said.
Economic foundations intact
But Benjamin Diokno, governor of the Bangko Sentral ng Pilipinas, is unperturbed, expressing optimism that the country’s fundamentals—including tempered inflation, low debt, a strong peso, and large foreign reserves— have remained intact despite the record-breaking slump.
“The economic managers view the economy’s plunge in the second quarter as temporary resulting from the strict and comprehensive lockdown during the period owing to the coronavirus pandemic,” Diokno said in a Viber message to reporters.
“But the recovery process is on its way…,” he added.
For Finance Undersecretary Gil Beltran, chief economist at the finance department, “the fiscal sector will continue to play an active supporting role” in the fight against the coronavirus, while leading the way in reviving growth.
“Restoring growth will depend to a great extent on the country’s acquiring the capacity to manage the health risks posed by the virus,” Beltran said in an economic bulletin.
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