Fitch revises Philippines outlook to negative

MANILA, Philippines — New York-based Fitch Ratings has lowered its outlook for the Philippines to negative from stable as it expects a slower recovery for the country from the pandemic-induced recession with a gross domestic product (GDP) growth of five percent instead of 6.3 percent this year.

A negative outlook means the debt watcher could downgrade the Philippines’ credit rating in the next 12 to 18 months if the country fails to recover from the pandemic.

This is the second revision given by Fitch after it lowered the country’s outlook to stable from positive in May last year, at the height of the strict lockdown measures
 imposed by the government to slow the spread of COVID-19 cases.

The revision of the Philippines’ outlook to negative reflects increasing risks to the credit profile from the impact of the pandemic and its aftermath on policymaking as well as on economic and fiscal outturns.

The last time the country received a negative outlook from debt watchers was in July 2005 when Fitch, together with S&P Global Ratings and Moody’s Investors Service, lowered the outlook as plans to oust then president Gloria Macapagal-Arroyo mounted.

“Fitch believes there are downside risks to medium-term growth prospects as a result of potential scarring effects, and possible challenges associated with unwinding the exceptional policy response to the health crisis and restoring sound public finances as the pandemic recedes,” it added.

The pandemic-induced recession extended to five quarters as the country’s GDP shrank by 4.2 percent in the first quarter of the year as the resurgence of COVID-19 infections prompted the reimposition of stricter lockdown and quarantine measures in the National Capital Region (NCR) and nearby provinces from March 29 to May 15.

The Philippines slipped into recession with a record 9.6 percent GDP contraction as the economy stalled when the entire Luzon was placed under enhanced community quarantine in the middle of March last year.

NCR and adjacent areas shifted to general community quarantine in June, paving the way for the partial reopening of the economy but reverted to modified enhanced community quarantine in August as COVID-19 cases soared.

Fitch, however, retained the country’s credit rating at BBB or a notch above minimum investment grade.

“The rating affirmation reflects the Philippines’ robust external buffers and projected government debt levels that, while rising, should remain just below the median for ‘BBB’ rated peers. These are balanced against low per capita income levels and indicators of governance and human development compared to peers,” the debt watcher said.

The “Road to A” initiative of the Philippines was derailed by the COVID-19 pandemic. Authorities were forced to set aside achieving the much-coveted ‘A’ rating as the country had to deal with the impact of the global health crisis.

Philippine economic managers are looking at a slower bounce back with a GDP growth of six to seven percent instead of 6.5 to 7.5 percent for this year and seven to nine percent instead of eight to 10 percent next year.

“The pace of economic recovery in 2021 has been set back by new highly transmissible variants and targeted mobility restrictions,” Fitch said.

Fitch now expects the country’s GDP to grow by five instead of the lowered 6.3 percent this year, 6.6 instead of 8.3 percent next year and 7.3 percent in 2023 before stabilizing at six to 6.5 percent starting 2024.

The credit rating agency said the target of authorities to vaccinate 70 percent of eligible population by end-2021 is ambitious as less than three percent are fully vaccinated as of end-June.

“New daily infections have been declining from their peak in April, but are still relatively high. The vaccination program that began in March was hampered by supply disruptions, but these are now beginning to ease,” it added.

It noted “green shoots” of recovery are emerging, facilitated by the fiscal and monetary policy response and the resilience of remittances from overseas Filipino workers and exports.

Fitch sees the country’s government debt-to-GDP ratio rising further to 52.7 percent in 2021 and 54.5 percent in 2022 as the national government borrows more to beef up its COVID-19 pandemic war chest.

Likewise, the budget deficit is seen widening to 8.8 percent in 2021 before narrowing to 6.4 percent in 2022 after swelling to 5.4 percent last year from 1.7 percent in 2019 due to increased spending for COVID-19 relief measures and weak GDP growth.

“The widening of the central and general government deficits reflects elevated spending by the government to support economic recovery. Our projections also factor in a gradual pick up in revenues from 2022,” Fitch concluded.