By Luisa Maria Jacinta C. Jocson, Reporter

THE PHILIPPINES’ credit rating may be upgraded if the economy grows faster than expected, S&P Global Ratings said.

“On the upside for us, the Philippines’ ratings could be raised if the economic recovery is even faster than what we currently project and if the government achieves even faster fiscal consolidation,” YeeFarn Phua, director at S&P Global Ratings, said in a webinar on Tuesday.

The Philippines currently holds a “BBB+” rating with a “stable” outlook from the debt watcher.

“The outlook on the sovereign ratings remains stable. Basically, this stable outlook reflects our expectation that the economy will continue to grow healthily,” Mr. Phua said.

The credit rater expects Philippine gross domestic product (GDP) growth to average 5.8% this year and 6.1% in 2025. These are both below the government’s 6-7% and 6.5-7.5% growth targets for this year and next, respectively.

In the second quarter of the year, Philippine GDP grew by 6.3%, the fastest since 6.4% in the first quarter of 2023. This brought the first semester growth to 6%.

Mr. Phua said the outlook is also “balanced by the fact that we believe fiscal performance will also improve over the next 24 months.”

The National Government’s (NG) budget deficit widened by 7.2% to P642.8 billion in the January-to-July period, latest data from the Treasury showed.

Mr. Phua also flagged potential risks, such as an economic slowdown, that could hinder a credit upgrade for the Philippines.

“On the downside, however, we believe that if economic recovery were to weaken, leading to the long-term growth rates below its peers, this will also lead to an associated weakening of the government’s fiscal and debt positions,” he said.

He also noted risks to external settings, such as the current account deficit.

“If we see that the (current account deficit) starts to get persistently large, this will actually lead to a structural weakening of the Philippines’ external balance sheet. And we believe this could exert downward pressure on the ratings.”

In the second quarter, the current account deficit reached $5.1 billion, which accounts for 4.6% of GDP. The BSP projects a $4.7-billion current account deficit for 2024, equivalent to 1% of GDP.

Meanwhile, Mr. Phua noted that S&P Global’s lower-than-expected growth forecasts for the Philippines are due to still-elevated interest rates.

“So far, the BSP has only cut once. Therefore, our expectation is that we expect the cutting phase to be done gradually over the next year or so. And therefore, monetary policy will still remain tighter than normal for a while more,” he said.

Last month, the Monetary Board delivered a 25-basis-point (bp) rate cut and brought the key rate to 6.25% from the over 17-year high of 6.5%. This was the first time the central bank cut rates since November 2020.

Prior to this, the central bank raised borrowing costs by a cumulative 450 bps from May 2022 to October 2023 to tame inflation.

“At the same time, we are also seeing the consumption and investments are also showing slowing momentum than usual,” Mr. Phua said.

“We believe this could last for some more time, given as the central bank moves tend to be a bit more long and variable lags before they can start to impact the real economy.”

THE BANGKO SENTRAL ng Pilipinas (BSP) could reduce local banks’ reserve requirement ratio (RRR) to as low as 7% this year, Metropolitan Bank & Trust Co. (Metrobank) said.

“While we expect the central bank to continue cutting rates in the coming months, we believe BSP Governor Eli M. Remolona, Jr. is also planning to reduce banks’ reserve requirements, as he previously hinted,” Metrobank Chief Economist Nicholas Antonio T. Mapa said in a commentary.

“We think (Mr.) Remolona might lower (RRR) by 250 basis points (bps) or 2.5 percentage points before the end of the year, with the first reduction likely to happen soon.”

The RRR is the percentage of bank deposits and deposit substitute liabilities that banks cannot lend out and must set aside in deposits with the BSP.

In June last year, the BSP reduced the ratio for big banks and nonbank financial institutions with quasi-banking functions by 250 bps to 9.5%.

The central bank has brought down the RRR for universal and commercial banks to a single-digit level from a high of 20% in 2018.

“Since RR changes are not considered policy moves, we believe the upcoming RR reduction could happen on any Thursday (when the Monetary Board meets weekly),” Mr. Mapa said.

The BSP chief earlier said they are seeking to bring down the banks’ RRR to as low as 5%, but added the timing is yet to be decided.

“Adjustments to the RR were once considered a policy adjustment. However, with the advent of the BSP’s interest rate corridor system and its accompanying liquidity management facilities, any RR reduction has been relegated to a simple operational adjustment,” Mr. Mapa said.

The start of RRR cuts “may not necessarily be announced during the regular policy cycle,” he added.

“With the BSP in easing mode, we expect RR reductions to be announced shortly after the Fed policy meeting or perhaps after the Philippines’ September inflation data is released, which could show inflation drop to around 2.3%.”

The Federal Open Market Committee (FOMC) is having its meeting from Sept. 17-18.

Philippine headline inflation eased to 3.3% in August from a nine-month high of 4.4% in July, latest data from the local statistics authority showed.

The BSP earlier said it expects inflation to ease further from August onwards. It expects full-year inflation to settle at 3.4%.

“Now that the BSP is looking to bring down its borrowing costs from elevated levels to more normal and supportive levels, the time appears ripe for another round of RR reductions,” Mr. Mapa added.

Mr. Remolona earlier signaled the possibility of another 25-bp cut before the year ends.

The Monetary Board cut benchmark interest rates by 25 bps to 6.25% at its Aug. 15 meeting, the first rate reduction in nearly four years.

However, Mr. Mapa said that it is still uncertain if slashing the RRR while interest rates are still elevated would lead to higher bank lending.

“Banks that have more funds available for lending might choose to deposit this money back with the central bank, where they can earn attractive interest rates of about 6.25%.”

Metrobank expects the central bank to reduce the RRR by 150 bps first, followed by another 100-bp cut within the year.

“As such, should the BSP carry out a 150-bp RR reduction in the near term, banks may become attractive again in the near term. However, caution about its impact on bank lending and overall growth momentum is warranted.”

Data from the central bank showed that outstanding loans of universal and commercial banks rose by 10.4% year on year to P12.14 trillion. This was the fastest growth since 13.7% in December 2022. — Luisa Maria Jacinta C. Jocson