Bleak Philippines outlook seen

MANILA, Philippines — Global rating agencies raised concerns over the continued deterioration of the near-term outlook of the Philippines as a result of the coronavirus pandemic.

Sagarika Chandra, associate director at Fitch Ratings, said Fitch may revise downward its projected gross domestic product contraction of four percent for the Philippines after the dramatic 16.5 percent GDP contraction in the second quarter.

“Given the Philippines’ difficulty in containing the virus, these downside risks are materializing and our current growth forecast of negative four percent for 2020 now seems optimistic and is likely to be revised down,” Chandra said.

The economy contracted by nine percent in the first half, prompting the Development Budget Coordination Committee (DBCC) to revise its projection to a deeper 5.5 percent contraction this year and a weaker recovery with a growth of 6.5 to 7.5 percent instead of eight to nine percent next year.

The pandemic-induced mobility restrictions have prompted fiscal authorities to look at a wider budget deficit for this year.

The DBCC is now looking at a wider deficit of P1.81 trillion or 9.6 percent of GDP for this year from P660.2 billion or 3.4 percent of GDP last year.

Chandra said the Philippines entered the crisis with fiscal buffers given its low general government debt ratio of 34.1 percent of GDP last year versus its equally rated peer median of 42.2 percent.

“These buffers are being eroded given the impact of the pandemic, but there is still some room at the Philippines’ rating level to accommodate some deterioration in the fiscal outlook,” she said.

With the expected higher borrowings to plug the deficit, Chandra said Fitch sees the Philippines’ general government debt ratio rising to 48 percent of GDP this year, lower than the peer median of 51.7 percent.

“In our ongoing monitoring of developments, we will assess the likelihood that after the coronavirus shock subsides, the fiscal deficit and public debt trajectory will be restored in line with the authorities’ medium-term framework. We will also assess the extent to which the crisis may impact the Philippines’ strong medium-term growth potential, which has been a support for the rating,” Chandra said.

For his part, Moody’s Investors Service vice president for sovereign ratings Christian de Guzman said the debt watcher is revising its forecast at this time as there are considerable downside risks to its economic and fiscal projections with the reimposition of modified enhanced community quarantine.

“Pending the effectiveness of the recently reimposed modified enhanced community quarantine, we do believe that real GDP growth did reach a trough in the second quarter, but that the recovery over the second half will be somewhat more subdued than previously assumed,” de Guzman said.

Moody’s is looking at a GDP contraction of 4.5 percent for the Philippines this year.

“In mid-July, we affirmed the Philippines’ sovereign rating and maintained the stable outlook, which balances our expectation of a recovery from the sharpest economic contraction in 35 years against the potential for an even larger downturn this year. (The latest) GDP print remains consistent with that assessment, while reinforcing the downside risks to our current forecasts for the Philippine economy and the government’s fiscal position,” de Guzman said.

De Guzman said that Moody’s view on 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, supported in part by the government’s track record of debt consolidation over the past decade.

De Guzman said the primary risk to that view is whether the coronavirus infection could be effectively brought under control.

Last Friday, Bangko Sentral ng Pilipinas Governor Benjamin Diokno said it was highly unlikely for debt watchers to downgrade the country’s credit rating on the back of its sound macroeconomic fundamentals.

Diokno cited the country’s relatively low debt-to-GDP ratio, one of the highest tax effort in the region, benign inflation and well managed inflation expectations, strong peso, hefty gross international reserves (GIR), and well-capitalized banking system with low non-performing loans (NPLs).