By Luz Wendy T. Noble
FITCH RATINGS on Thursday evening downgraded its outlook for the Philippines to “stable,” less than three months since it gave a “positive” outlook, as the economy faces a recession amid the coronavirus pandemic.
At the same time, the global debt watcher affirmed the country’s credit rating at “BBB” — a notch above the minimum investment grade which it gave in December 2017.
“The revision of the outlook reflects deterioration in the Philippines’ near-term macroeconomic and fiscal outlook as a result of the impact of the global COVID-19 pandemic and domestic lockdown to contain the spread of the virus,” it said in a note sent to reporters on Thursday.
A stable outlook indicates that the country’s rating is likely to be maintained rather than lowered or upgraded in the medium- and long-term or over the next 18-24 months.
Despite the lower outlook, Finance Secretary Carlos G. Dominguez III said in a statement: “The Philippines is in a good fiscal position to deal with the unprecedented challenges posed by this contagion that has brought the global economy to the cusp of a recession.”
“The BSP’s long list of prompt and decisive policy support measures — including the cumulative 125 basis points (bps) cut in the policy rate and the 200 bps reduction in the reserve requirement ratio so far this year — shows that we have been putting our elbow room to good use,” BSP Governor Benjamin E. Diokno said in the same statement.
In February, Fitch Ratings upgraded the country’s credit rating outlook to “positive,” citing positive economic growth, healthy fiscal conditions and its aggressive infrastructure development drive.
Now, Fitch Ratings estimates the country’s gross domestic product (GDP) to contract by 1% in 2020, a sharp revision from the 6.4% forecast it gave last year.
This compares to the flat growth to 1% contraction projected by economic managers from an initial 6.5 to 7.5% growth target range before the virus hit the country.
“Fitch projects the economy will contract this year, and that fiscal relief measures will contribute to a widening of the 2020 general government deficit by more than 3.5 percentage points of GDP,” it said.
“Under our baseline, we assume a gradual economic recovery from Q320, and we expect growth of 7% in 2021,” it added.
In the first quarter, the country’s gross domestic product shrank by 0.2%, breaking 84 quarters of uninterrupted growth. This, after the economy grew by six percent in 2019, based on 2018 prices.
Despite the headwinds brought by the pandemic, Fitch said it kept the credit rating of the Philippines at “BBB” because of its sound economic position before the outbreak.
“The affirmation of the ‘BBB’ rating reflects the Philippines’ fiscal and external buffers, including its lower government debt/GDP ratio compared with peer medians and net external creditor position, as well as its still-strong medium-term growth prospects,” Fitch said.
The pandemic is expected to impact remittance inflows, which contribute about 8% to the GDP. Fitch said remittances will likely drop by 2.5% this year, as inflows from oil-sensitive Middle East countries accounts for 20% of total cash remittances in 2019.
“We also forecast tourism receipts, which account for 2.5% GDP, to contract by about 70% before beginning to recover gradually later in the year,” Fitch added.
The decline in both tourism receipts and remittances will spill over to the country’s current account, which may see a wider deficit of -1.6% in 2020 from the -0.2% seen in 2019, Fitch said.
“Exports are also projected to contract by about 2% on account of weak external demand. Sharply lower oil prices and lower import demand mitigate the impact on the current account,” it added.