Philippines keeps investment grade rating but Fitch warns vs vaccine rollout delay

FITCH RATINGS affirmed the Philippines’ long-term foreign currency issuer default rating at “BBB” with a stable outlook, on the back of modest government debt levels and still-strong growth prospects amid the coronavirus crisis.

However, the global debt watcher acknowledged that the economic impact of the pandemic on the Philippine economy in 2020 was “more significant” than initially expected, “due to the domestic infection rate and government policy measures to curb the spread of the virus.”

“The affirmation of the Philippines’ ‘BBB’ rating and stable outlook balances modest government debt levels relative to peers, robust external buffers and still-strong medium-term growth prospects, notwithstanding the deep pandemic-induced economic contraction, against relatively low per capita income levels and indicators of governance and human development compared to peers,” Fitch said in a note on Monday.

The stable outlook indicates the country’s rating could be unchanged for the next 18 to 24 months.

The government had implemented a strict lockdown in mid-March 2020 to curb the rise in coronavirus disease 2019 (COVID-19) infections, but this severely affected private consumption and investment. As a result, the Philippine economy slumped into a recession, with gross domestic product (GDP) contracting by 10% year on year in the January to September period.

“We estimate full-year GDP to have contracted by 8.5% in 2020, after accounting for an improvement in activity indicators in 4Q,” Fitch said. Government economic managers said GDP likely slumped by 8.5-9.5% in 2020.

The ratings agency said economic activity will continue to recover in the next quarters, with GDP growth estimated at 6.9% and 8% in 2021 and 2022.

However, Fitch warned a delay in the rollout of COVID-19 vaccines may hurt the Philippines’ growth prospects.

“The potential for a delay [in vaccine distribution] poses downside risks to our growth forecasts, while an effective vaccine rollout could result in a faster-than-expected recovery in growth,” it said.

While there was a drop in daily reported COVID-19 cases in recent months, experts have warned of a possible surge after the holiday season. On Monday, the Health department reported 2,052 COVID-19 infections, bringing the total to 489,736.

The government is aiming to start the vaccine rollout as early as February, vaccine czar Carlito G. Galvez, Jr. told the Senate on Monday. However, he admitted most of the vaccinations will begin in the second half of the year. Regulators have yet to approve any COVID-19 vaccine in the country.

At the same time, Fitch flagged downside risks arising from the presidential elections in 2022 and the fiscal impact of the 2018 Supreme Court ruling that requires the National Government to increase revenue allotments to local governments.

“Downside risks could stem from presidential elections scheduled in May 2022 that create some uncertainty regarding the post-election fiscal strategy, or from weaker-than-expected economic growth in the aftermath of the health crisis that could make fiscal consolidation more challenging,” Fitch said but added that it expects the medium-term fiscal framework to remain intact.

Also, the debt watcher said the financing extended by the central bank to the National Government is only temporary. “However, ongoing recourse to direct central-bank financing of the budget deficit beyond the immediate needs of the health crisis could undermine investor confidence and financial stability by raising questions about the independence of monetary policymaking,” it said.

The Philippine banking system, Fitch said, continues to be stable, although lenders will continue to show weaker profits this year due to slim margins and lack of outsized trading gains.

“The deterioration in reported asset-quality metrics is likely to accelerate in early 2021 as debt moratoria expired in December 2020, but large pre-emptive general provisioning taken by banks in the preceding year should help the major banks avert significant capital impairment,” it said.

FACTORS TO WATCH
Fitch cited several factors that could lead to a negative rating action or downgrade, such as the “sustained rise in the government debt-to-GDP ratio associated with a reversal of reforms or departure from prudent macroeconomic policy framework that leads to sustained higher fiscal deficits;” and the failure to return to “historically high” pre-pandemic growth rates.

Another factor that could lead to a negative rating action would be the weakness in external indicators, including dollar reserves, current account deficit, and net external debt — as Fitch said such scenarios reflect deteriorating resilience of the Philippine economy to shocks.

“Fitch will monitor the post-pandemic evolution of the fiscal deficit and debt levels, as the balance between fiscal consolidation and ongoing government spending to support economic growth will be an important consideration for the rating over the medium term,” it added.

On the other hand, the Philippines’ rating could be upgraded if the revenue base is broadened; and governance standards are strengthened.

In a statement, Finance Secretary Carlos G. Dominguez, III said the country’s maintained rating shows it remained credit- and investment-worthy throughout the crisis.

“We continued our commitment to prudent fiscal and debt management even as we start spending big on COVID-19 response measures to revive the economy and restore both business and consumer confidence,” Mr. Dominguez said.

Meanwhile, Bangko Sentral ng Pilipinas Governor Benjamin E. Diokno noted they were “among the first central banks” that responded to the crisis as they slashed rates as early as February.

“We deemed it important to signal to the market that we were ready to act swiftly and decisively to buoy market confidence, as well as to ensure sufficient liquidity and efficient functioning of the financial system,” Mr. Diokno said.

Given the central bank already slashed rates by 200 basis points cumulatively last year, Fitch said it will have “very limited” space for further rate cuts in 2021. The key policy rate is currently at 2% which is already below the 2.6% average inflation logged in 2020.

S&P Global Ratings also affirmed its BBB+ long-term credit rating with a stable outlook for the Philippines in May last year. Moody’s Investors Service likewise kept its Baa2 rating with a stable outlook by July. — Luz Wendy T. Noble