Credit raters to keep close eye on PHL recovery

By Luz Wendy T. Noble, Reporter

THE country’s pace of recovery after the crisis will be a key consideration in sovereign rating assessment, according to credit raters.

“Against this backdrop, our sovereign ratings will be not solely be determined by the immediate impact on credit metrics this year, but also the extent to which a country’s fundamentals can be restored towards their pre-coronavirus shock levels over the medium-term,” Christian de Guzman, senior vice-president of sovereign risk group at Moody’s Investors Service, said in an e-mail.

In May, Moody’s affirmed the country’s “Baa2” rating, a notch above minimum investment grade, and kept a stable outlook.

The debt watcher projects the country’s gross domestic product (GDP) to contract by 2% this year, before bouncing back to a 6.4% growth in 2021.

As the fallout from the pandemic widens, the government estimates GDP to shrink by 2-3.4% this year, after 6% growth in 2019.

Sagarika Chandra, associate director for sovereign ratings — APAC (Asia Pacific) at Fitch Ratings, said their “stable” outlook for the Philippines assumes a decline in fiscal deficit from 2021 onwards when the crisis subsides and the economy recovers.

A “stable” outlook signals that a country’s credit rating is likely to be maintained within the next six months to two years. Fitch has downgraded the Philippine outlook to “stable” in May from the “positive” outlook it gave in February, after factoring in the economic impact of the pandemic. On the other hand, it has affirmed its “BBB” credit rating.

Fitch estimates the country’s economic output to contract by 4% this year, and to grow by 7.4% in 2021.

“However, failure to successfully consolidate the deficit and bring down debt levels once the pandemic recedes could be negative for the credit rating,” Ms. Chandra said in an e-mail to BusinessWorld.

The national government’s budget balance stood at a deficit of P273.9 billion as of April, a reversal from the P86.9-billion surplus a year ago and wider than the P59.5-billion deficit in March, data from the Bureau of the Treasury showed.

Amid the crisis, the government projects the budget to reach 8.4% of GDP this year. In 2019, the country’s fiscal deficit was at P660.2 billion or 3.55% of GDP.

Meanwhile, the government expects debt-to-GDP to rise to 49.8% this year from the revised end-2019 level of 39.6%.

Ms. Chandra said Fitch expects “BBB” sovereigns to see a general government debt-to-GDP ratio median of 52.6% this year from 42.9% in 2019. She expects the Philippines will see a ratio lower than its peers despite a projected increase in fiscal deficit.

“This reflects the fact that the Philippines entered the coronavirus crisis with relatively more fiscal space to address the economic downturn than many of its ‘BBB’ peers,” she said.

Ms. Chandra added their credit assessment also puts an emphasis on debt trajectory over the medium term rather than fiscal deficit level in a single year.

Moody’s Mr. De Guzman said they are banking on the country’s track record in the past years.

“Given the Philippine government’s track record over the past decade with regards to fiscal management, we expect that the cyclical shock posed by the coronavirus does not represent a permanent departure from the trend improvement in fiscal sustainability,” he said.

Aside from fiscal deficit and debt metrics, Fitch’s Ms. Chandra said their credit assessment will also look into vital metrics that include dollar reserves, tax reforms, and some structural indicators.

Central bank data showed gross international reserves reached an all-time high of $90.942 billion as of end-April, providing ample cover for eight months of imports of goods.

Meanwhile, the Corporate Recovery and Tax Incentives for Enterprises Act (CREATE), which provides for the immediate reduction of corporate income tax to 25% from the current 30%, is still pending at the Senate. Congress resumes session in late July.

Ms. Chandra noted the Philippines’ “general government revenues are still weaker than the peer median.” The country’s structural indicators also lag behind peers, including per capita income, governance standards and human development, she said.

The Japan Credit Rating Agency recently upgraded the country’s credit rating to “A-” with a “stable” outlook, saying it expects the pandemic’s impact on the economy will only be temporary.

Meanwhile, S&P Global Ratings affirmed its “BBB+” rating as well as its “stable” outlook for the Philippines in late May.