By Luz Wendy T. Noble, Reporter

The country’s credit rating is likely to be threatened despite the record drop in the second quarter gross domestic product (GDP), Bangko Sentral ng Pilipinas Governor Benjamin E. Diokno said on Friday.

“Does the Philippines risk having a ratings downgrade? Highly unlikely,” Mr. Diokno said in a Viber message to reporters on Friday.

The central bank chief’s statement came a day after the release of the second quarter GDP data which showed a record decline of 16.2% since at least available government data dating back to 1981. This followed the 0.7% drop in the January to March period, which signals the country officially entering technical recession or two consecutive quarters of GDP contraction.

Mr. Diokno said the Philippines is not among the 82 sovereigns which saw outlooks downgraded to negative by credit raters in the first half of 2020.

“The sharp fall in Q2 GDP does not pose a danger to the Philippines’ strong macroeconomic fundamentals: relatively low debt-to-GDP ratio, one of the highest tax effort in the region, benign inflation and well managed inflation expectations, strong peso, hefty gross international reserves, well capitalized banking system with low non-performing loans,” Mr. Diokno said.

The latest rating affirmation came from Moody’s Investors Service which kept its Baa2 rating with a stable outlook for the Philippines on July 16, saying its strong fiscal position in recent years will be its buffer against the impact of the pandemic. The Baa2 rating was given in December 2014.

In May, S&P Global Ratings also maintained its BBB+ long term credit rating and “stable” outlook. The same month saw the affirmation of Fitch Ratings for the country’s BBB rating, although it downgraded its outlook to “stable” from the “positive” given in February.

On Thursday, the government revised its GDP projection to a wider contraction of 5.5% this year from the previous -2% to -3.4% forecast. Economic managers also placed a slower 6.5% to 7.5% growth estimate for next year from the previous 8%-9% projection in May.

“The economic managers view the economy’s plunge in the second quarter as temporary resulting from the strict and comprehensive lockdown during the period owing to the coronavirus pandemic,” Mr. Diokno said.

“We should craft a strong economic recovery program accompanied by more structural reforms that would allow the Philippines to rebuild better for the future,” he added.

Meanwhile, Fitch said it already factored in some deterioration in the country’s credit rating given the on-going crisis during its last rating review.

“We noted at that time that the economic projections were uncertain and subject to considerable downside risks depending on how the virus runs its course globally and domestically and the possibility of a further extension or re-imposition of lockdown measures,” Sagarika Chandra, Associate Director at Fitch said in a note sent to reporters on Friday.

Ms. Chandra said they are looking at a likely downward revision of their -4% GDP contraction forecast for 2020 given the country looks to be having difficulty in arresting the spread of the virus.

In terms of the country’s fiscal buffers, the country continues to have some room in accommodating the worsening outlook, Ms. Chandra said.

“In particular, we now estimate the general government debt ratio to rise to around 48% of GDP in 2020, still below the projected peer median of 51.7%,” she said.

Moving forward, Ms. Chandra said they will look into whether fiscal deficit and public debt trajectory will be in line with authorities’ medium-term framework after the COVID-19 shock subsides.

“We will also assess the extent to which the crisis may impact the Philippines’ strong medium-term growth potential, which has been a support for the rating,” she said.

A downgrade to a negative outlook from any of the big three credit raters in the next months will not be a surprise given the Philippines is likely to seal a “dirty L-shaped recovery” and going into a lower GDP path, according to ING Bank-NV Manila Senior Economist Nicholas Antonio T. Mapa.

“With no consumption, government revenue streams dry up with the recent pandemic showcasing that point clearly. Strained revenue streams will eventually put pressure on the fiscal position and eat away at the buffers erected over the years of fiscal discipline,” Mr. Mapa said in a note.

Before the pandemic, the government was targeting to clinch a single A rating in order to get access to low interest loans as the country was poised to become an upper middle-income economy.

The Philippine economy faces a “painful recession” this year, as the country struggles to curb the spread of the coronavirus disease 2019 (COVID-19) pandemic, according to Fitch Solutions Country Risk and Industry Research.

In a commentary released on Friday, Fitch Solutions slashed its outlook for Philippine gross domestic product (GDP) this year to -9.1% in a base case scenario, and -10.8% if stricter lockdown measures continue through December.

This is much worse than the -2% outlook it gave in May and a reversal from the 6.3% growth forecast it gave in January before the pandemic. It is also a wider contraction than the latest -5.5% GDP estimate released by the Development Budget Coordination Committee on Thursday.

“With another surge in COVID-19 cases in Q320, the recovery in economic activity we had expected in (the second half) now looks highly unlikely,” Fitch Solutions said.

The Health department on Friday reported 3,379 additional coronavirus cases, bringing the tally to 122,754. Reuters reported the Philippines now has the highest number of cases in Southeast Asia and other parts of eastern Asia including China.

Metro Manila and nearby provinces are once again under a lockdown until Aug.18, as the government hopes to temper the rise in coronavirus infections.

“However, with parts of the economy being put back into lockdown and fiscal expenditure expected to be directed to social welfare and loan guarantee programmes through (the second half), the economy will face a delayed recovery,” Fitch Solutions said.

The economy plunged into a recession as it shrank by 16.2% in the April to June period, following the 0.7% drop in the first quarter.

Fitch Solutions said the base case forecast assumes a fall in new infection cases that could lead to further easing of restriction measures by the fourth quarter, thereby leading to some improvement in domestic activity.

“We expect policymakers to maintain a dovish stance until the recovery is fully underway, with a focus on boosting capital investment,” it said.

However, Fitch Solutions also laid out a downside scenario of a much deeper 10.8% GDP contraction if tight restriction measures continue to be imposed from August to December.

In this case, the government will be burdened with the continued surge in infection which will take its toll on medium-term growth and result to less productive fiscal spending and higher levels of debt, it said.

“The impact on households would become more painful as unemployment rose further and poverty levels increased,” Fitch Solutions said, noting it would expect more stimulus measures, handouts, and subsidies to support households in this scenario.

This weaker environment will lead to a more subdued recovery by 2021 where Fitch Solutions sees a 6.2% growth, slightly revised from the previous 6.5% forecast.

Fitch Solutions said while retail and recreation activity will gradually pick up in the coming quarters once restriction measures are lifted, the economic shock from the pandemic will continue to hurt households through unemployment, weaker remittance and confidence shock.

Unemployment rate surged to a 15-year high of 17.7% in April from the 5.1% seen a year ago, according to data from the Philippine Statistics Authority. This translates to 7.25 million jobless Filipinos, three times more than the 2.27 million recorded in April 2019.

Cash remittances, which also fuels household consumption that makes up 70% of the economy, sank by 19% to $2.106 billion in May, according to data from the Bangko Sentral ng Pilipinas. This, as more than 115,000 Filipinos have been repatriated so far due to the on-going pandemic crisis. — Luz Wendy T. Noble