MOODY’S Investors Service said it further downgraded its 2020 gross domestic product (GDP) forecast for the Philippines to 2.5% due to the escalating impact of the coronavirus disease 2019 (COVID-19) outbreak and the enhanced community quarantine (ECQ) imposed on Luzon.

It said COVID-19 will also pose near-term challenges to the country’s credit profile, which had been built on a recent record of strong economic performance, an improved fiscal position and limited vulnerability to external risks.

In its latest Credit Opinion about the Philippines, Moody’s said the new 2.5% GDP forecast slashes the already-downgraded 5.4% projection issued in March and the initial 6.2% forecast it gave last year.

“We lowered the forecasts for GDP growth to reflect the expected impact of the widening spread of the coronavirus both globally and in the Philippines,” Christian de Guzman, senior vice-president, Sovereign Risk Group at Moody’s said in an e-mail to BusinessWorld.

The revised view on growth from Moody’s falls within the -0.6% to 4.3% range of estimates issued for various scenarios by the National Economic and Development Authority in the wake of COVID-19. Initially, the government had set a 6.5-7.5% growth target for 2020.

According to Mr. De Guzman, the Luzon lockdown disrupts economic activity across all sectors.

“Domestically, the imposition of the ECQ will curtail domestic activity — not just household consumption and private investment, but also the government’s implementation of its infrastructure development program,” he said.

The original month-long lockdown was imposed on Luzon, which accounts for about 70% of Philippine GDP. The government has decided to extend the lockdown by two more weeks to April 30.

Mr. De Guzman said that the Moody’s growth forecast for the Philippines is likely to be further downgraded depending on the duration and extent of the containment effort.

“The growth outlook is subject to further downside if the coronavirus outbreak is not resolved by the middle of the year, and if more stringent containment measures are implemented in the Philippines or its largest trading partners,” he said.

Moody’s said the Philippines’ growth will be strong in the context of its peer economies.

“Moody’s expects the Philippines’ real GDP growth to remain robust relative to peers and that its fiscal metrics will continue to strengthen as the government continues to make progress on its socioeconomic reform agenda, particularly on tax reform,” it said.

However, it cited downside risks that could affect the rating outlook due to the broader impact of COVID-19.

“The global coronavirus outbreak threatens the Philippines through a number of channels, including trade, supply chain linkages, investment, remittances and tourism, while stringent containment measures will also sharply curtail domestic demand,” it said.

It added political developments could likewise be the potential source of downside risk for the Philippines’ “stable” outlook.

“Domestic political developments, such as the administration’s controversial campaign against illegal drugs, also present downside risks to the country’s institutional profile and could hinder the further implementation of reform,” it said.

Moody’s has a Baa2 rating for the Philippines, a notch above minimum investment grade, dating back to 2014.

The ratings agency said a possible review of the sovereign rating will depend on improvement in per capita income and government revenues growth if its borrowing costs fall to nearer those enjoyed by higher-rated economies.

“This could materialize over time as the government makes greater progress on its reform agenda, including addressing infrastructure gaps, increasing competitiveness and the ease of doing business, and ensuring sustainable and inclusive growth,” it said.

On the other hand, a downgrade could also follow a bout of macroeconomic instability, which could produce a deterioration in fiscal and government metrics, Moody’s said.

“The reversal of reforms that have supported recent gains in economic and fiscal strength would also likely lead to a downgrade,” it said. — Luz Wendy T. Noble