Fitch keeps negative outlook for PHL amid debt, growth concerns

By Jenina P. Ibañez, Senior Reporter  

Fitch Ratings affirmed the Philippines’ investment grade rating but also maintained the negative outlook, as it flagged uncertainties to the country’s medium-term growth trajectory and hurdles to bringing down debt. 

“The negative outlook reflects uncertainty about medium-term growth prospects as well as possible challenges in unwinding the policy response to the health crisis and bringing government debt on a firm downward path,” the credit rater said in a note on Friday. 

A negative outlook means Fitch could downgrade the Philippines’ credit rating in the next 12 to 18 months. The outlook was revised to negative from stable in July 2021 due to the impact of the pandemic on the economy. 

Fitch Ratings said it maintained the “BBB” credit rating as the Philippines balances strong external buffers against lagging per capita income and governance indicators. 

“It also reflects weak government revenue mobilization compared with peers and government debt/GDP (gross domestic product) that rose sharply from pre-COVID-19 pandemic levels but is forecast to stay close to the ‘BBB’ median over the next few years,” Fitch Ratings said. 

A “BBB” rating indicates low default risk and adequate capacity to pay, although some unfavorable economic conditions could impede said capacity. 

The Philippines ended 2021 with P11.73 trillion in outstanding debt, up 19.7% year on year as the government continued to ramp up borrowings to finance its pandemic response. 

The country’s debt-to-GDP ratio stood at 60.5% as of end-2021, a tad higher than the 60% threshold considered as manageable by multilateral lenders for developing economies and the highest since the 65.7% seen in 2005. 

The Bangko Sentral ng Pilipinas (BSP) in a statement said the Philippines has maintained the same rating throughout the pandemic, in contrast to ratings downgrades seen by many other countries. 

“Besides improvement in the COVID situation amid rising vaccination rates, we also see that rising credit activities and a favorable inflation outlook will support growth moving forward,” BSP Governor Benjamin E. Diokno said. 

“The Philippine banking system has kept the impact of the crisis manageable. Philippine banks continue to serve the rising demand for credit. We also expect inflation to stay well within the target range of 2%-4% this year up to 2024, which will provide an enabling environment for consumption and investments,” he added. 

Fitch Ratings also retained its Philippine GDP forecast for 2022 at 6.9%, but cut the estimate for 2023 to 7% from 7.1% previously. 

It said risks that could lead to a credit rating downgrade include reduced confidence in returning to strong medium-term growth and the failure to cut the debt-to-GDP ratio. Potential failure could be caused by a reversal of tax reforms or a far from prudent macroeconomic policy framework. 

In contrast, a ratings upgrade could stem from stronger public finances backed by a broader government revenue base that cuts down the debt-to-GDP ratio. 

“Fitch upholding the current rating was expected. The true test would be to retain our rating by June as this would be one year from Fitch downgrading our outlook to negative,” ING Bank N.V. Manila Senior Economist Nicholas Antonio T. Mapa said in an e-mail. 

He said medium-term growth prospects are still far from positive given the economic scars caused by the pandemic and the debt-to-GDP ratio. 

“Unwinding the extraordinary stimulus carried out during the pandemic will likely be more challenging than anticipated with BSP extending the cash advance to the national government into 2022,” he said. 

UnionBank of the Philippines, Inc. Chief Economist Ruben Carlo O. Asuncion meanwhile said the country is at a pivotal point due to the upcoming change in administration. The national elections is scheduled on May 9. 

“We have to see a credible fiscal reform strategy from the incoming administration and Congress that will support an already precarious economic recovery and consequently deal with rising debt-to-GDP ratios and other important fiscal metrics,” he said in a Viber message. 

Although the country will be led by a new administration by June, Finance Secretary Carlos G. Dominguez III said the “deep bench of technocrats” guiding the country’s economic policies will stay beyond June and will continue pursuing structural reforms. 

“These, in turn, will help the Philippines sail through its next stage of economic development as we expect the Philippines to transition from lower-middle-income to upper-middle-income status this year.”