PHL credit rating downgrade unlikely, says Diokno

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A store is blocked with makeshift barricades in Manila amid the Luzon-wide lockdown, March 24. -- REUTERS

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.