New lockdown may weaken PHL rating buffers

By Luz Wendy T. Noble, Reporter

THE continued spread of the coronavirus disease 2019 (COVID-19), which prompted renewed lockdown restrictions in Metro Manila and nearby provinces, may further erode rating buffers of the Philippines, Fitch Ratings said.

“Downside risks to our economic projections for the Philippines, noted in our last rating review in May…are materializing due to the country’s difficulty in containing the virus,” the global debt watcher said in a note on Tuesday.

The Health department on Tuesday reported 2,987 new COVID-19 cases, bringing the total to 139,538 — the highest in Southeast Asia.

Fitch noted the rising number of coronavirus infections and the renewed lockdown, which will end on Aug. 18, are likely to depress economic growth by much more than it earlier anticipated.

It said it would likely lower its earlier forecast of a 4% contraction in gross domestic product (GDP) this year.

In May, Fitch downgraded its outlook for the Philippines to “stable” only three months after it gave a “positive” outlook. A stable outlook indicates that a country’s rating is likely to be maintained in the next 18-24 months. It affirmed the country’s credit rating at “BBB” — a notch above the minimum investment grade that it gave in December 2017.

S&P Global Ratings also kept its BBB+ long-term credit rating and stable outlook for the country in May. Moody’s Investors Service  likewise affirmed the country’s Baa2 rating with a stable outlook on July.

In its Tuesday note, Fitch said the government might find it difficult to limit pandemic-related spending if the economy “continues to contract and fails to recover as fast as the authorities expect.”

“If the recovery stalls, there may be pressure for even more fiscal stimulus,” Fitch said.

Finance Secretary Carlos G. Dominguez III earlier rejected calls to increase the government’s P180-billion economic stimulus package.

“Whatever stimulus package we have, it has to be affordable and it has to recognize the fact that this virus may not be defeated by the end of this year. So we have to keep, as they say, we have to keep our powder dry for next year as well,” Mr. Dominguez said.

The Philippines plunged into a recession after the economy shrank by 16.5% in the second quarter. The government expects the economy to contract by 5.5% this year, worse than its earlier forecast of 2% to 3.4% contraction.

“The Philippines entered the crisis with fiscal buffers, given its low general government debt ratio of 34.1% of GDP, against the ‘BBB’ peer median of 42.2%. These buffers are being eroded by pandemic-related economic shock, but there is still room to accommodate some deterioration in the fiscal outlook,” Fitch said.

It also flagged the country’s current account deficit, which is “unlikely to go back to its pre-crisis standing by 2021 to 2022,” but said this alone is unlikely to be a significant risk to the country’s rating.

“We do not expect the current-account deficit to return to pre-crisis levels in 2021-2022, as the recovery in domestic import demand will largely offset the improvement in exports as the pandemic’s effects ease,” it said.

Oxford Economics said a “precarious situation” remains in India, Indonesia and the Philippines, where infections continue to surge and workplace mobility has yet to recover.

“These economies remain highly vulnerable, given weak public health infrastructure and limited fiscal resources,” it said in a note on Tuesday.

Meanwhile, an improvement in the country’s credit rating could help lure foreign investments and lower borrowing costs for the Philippines, Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said.

Amid the worsening impact of the pandemic, a critical factor to manage credit ratings will be the country’s economic recovery, UnionBank of the Philippines, Inc. Chief Economist Ruben Carlo O. Asuncion said.

“For the Philippines, economic recovery will depend on the virus outbreak path, the magnitude of the policy response, and consumer and corporate consumption behaviors,” he said in a text message, noting this would likely be gauged by credit raters as well.

Meanwhile, Asian Institute of Management economist John Paolo R. Rivera said credit ratings are likely to be “compromised” based on second-quarter GDP data. He added that credit ratings are not “the best metrics to assess future defaults.”

“It seems that credit ratings are more of political signals because it’s easier to explain the movement in credit rating than the implications of fiscal policies,” he said in a text message, noting that inflation is still within target.