S&P affirms Philippines investment grade

MANILA, Philippines — S&P Global Ratings slashed anew the gross domestic product (GDP) growth forecast for the Philippines, but affirmed the country’s investment grade BBB+ rating and stable outlook.

The rating – equivalent to two notches above minimum investment grade – reflects the country’s above-average economic growth potential that is seen to drive constructive development outcomes and underpin broader credit metrics, while the stable outlook shows the country can maintain healthy growth rates and its fiscal performance will materially improve over the next 24 months.

The debt watcher now expects the Philippines to book a lower GDP growth of 6.3 percent instead of 6.5 percent for this year, and 5.7 instead of 6.6 percent for next year, both lower than the targets set by the Development Budget Coordination Committee (DBCC).

While the Philippine economy is gathering pace this year following an uneven recovery in 2021 due to recurring COVID-19 waves, S&P said economic growth could ease next year as sluggish macro global conditions persist.

“Slower growth of the world economy, including that of China and the US (the Philippines’ biggest trading partners), will also act as economic drags. We forecast real GDP growth of 5.7 percent for next year,” S&P said.

According to S&P, the country’s GDP per capita could rise to about $3,640 in 2022 and $3,838 in 2023, while real GDP per capita growth could average about 4.6 percent per year over 2023 to 2025 period.

“Nonetheless, economic growth should be well above the average for peers at a similar level of development on a 10-year weighted average per capita basis. The country has a diversified economy with a strong record of high and stable growth. This reflects supportive policy dynamics and an improving investment climate,” it added.

The Philippine economy is off to a strong start as GDP growth averaged 7.7 percent from January to September this year, above the 6.5 to 7.5 percent target penned by economic managers.

The country booked a stronger-than-expected GDP expansion of 7.6 percent in the third quarter of the year from 7.5 percent in the second quarter despite the elevated inflation that prompted the Bangko Sentral ng Pilipinas (BSP) to raise key policy rates.

To tame inflation and stabilize the peso, the BSP Monetary Board hiked interest rates by 300 basis points this year, bringing the overnight reverse repurchase rate to five percent from an all-time low of two percent.

Inflation averaged 5.4 percent in the first 10 months of the year, above the BSP’s two to four percent target range, after quickening to a 14-year high of 7.7 percent in October from 6.9 percent in September.

“This is likely to constrain private consumption,” S&P warned.

According to the debt watcher, the government’s need to provide support measures countering high inflation through non-monetary initiatives, such as lower tariffs and cash assistance to affected sectors, hampers a better fiscal outcome.

“So does slightly lower growth expectations against challenging external developments. The fiscal shortfall should continue to narrow over the coming years while the economy regains its footing and the government scales back stimulus measures. The medium-term fiscal framework revealed by the new administration is expected to guide the consolidation process,” it said.

The credit rating agency sees a lower general government deficit of five percent of GDP for this year after widening to six percent of GDP in 2021 from 5.7 percent of GDP in 2020.

“A confluence of high inflation and tightening economic global conditions will prevent a faster reduction of the deficit this year. The government’s fiscal position will gradually improve as the economy stabilizes. However, the fiscal position will likely take longer than our forecast period to recover to pre-pandemic levels,” it said.

It pointed out that the ongoing economic recovery should facilitate a reduction in the general government deficit and a further stabilization of debt burden starting 2023.

“However, restoring the fiscal and debt settings to pre-COVID-19 levels over the next 12 to 24 months could be challenging. This is given higher commodity prices, tightening monetary policies in developed countries, and continued supply chain disruptions,” S&P said.

It added that developments such as the Russia-Ukraine conflict, a faster tightening of monetary policy by the US Federal Reserve than the market expects, and a wider current account deficit are adding pressure to the peso.

The local currency is back to the 57 handle, with the BSP actively participating in the foreign exchange market to smoothen the volatility, after depreciating by as much as 15.7 percent to close at an all-time low of 59 to $1 several times last month.

The country’s gross international reserves (GIR) level fell to $94.1 billion at the end of October from $108.8 billion at the end of 2021.

“Nonetheless, the reserves continue to act as a strong external buffer. They can cover seven to eight months of current account payments.

The credit rating agency said that remittances from overseas Filipino workers (OFWs), as well as foreign direct investments (FDIs), would remain as major sources of US dollars.