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Credit raters awaiting incoming administration’s fiscal consolidation plan

A view of residential condominium buildings in Mandaluyong City, Metro Manila, Philippines, Aug. 22, 2016. — REUTERS

By Luz Wendy T. Noble, Reporter
and Tobias Jared Tomas

CREDIT RATING agencies will keep a close eye on how the incoming Marcos administration will manage the country’s mounting debt in assessing the Philippines’ sovereign rating.

Moody’s Investors Service is also concerned over debt affordability as it reflects a sovereign’s fiscal flexibility, said Christian de Guzman, senior vice-president at Moody’s sovereign risk group.

Debt affordability is the ratio of annual interest payments required to maintain a government’s debt to its annual tax revenues.

“Indeed, while there has been a large increase in government debt that has in essence reversed the progress in debt reduction that was made in the decade prior to the pandemic, we have not seen a similarly large deterioration in debt affordability for the Philippines,” Mr. De Guzman said in an e-mail.

The National Government’s outstanding debt rose to a record-high P12.68 trillion as of end-March, according to the Bureau of the Treasury (BTr).

“For comparison, the last time the Philippine government had seen debt levels similar to that today, which was in the early to mid-2000s, the interest payments to revenue ratio was several magnitudes worse than what we are seeing today,” Mr. De Guzman said.

The relatively stable interest rates as well as continued tax reforms have helped improved debt affordability for the Philippines, he said.

Moody’s last affirmed its “Baa2” credit rating with a “stable” outlook for the Philippines in July 2020.

“As factors that would prompt a downgrade of the Philippines’ sovereign rating, we have previously cited a greater deterioration in fiscal and government debt metrics relative to peers or an erosion of the country’s external payments position that threatens liquidity conditions,” Mr. De Guzman said.

Any reversal of economic reforms, “substantial deterioration in institutions and governance strength, with signs of erosion in the quality of legislative and executive institutions,” would also be negative, he added.

The National Government’s debt-to-gross domestic product (GDP) ratio hit 63.5% as of end-March, the highest in 12 years. It also exceeded the 60% threshold considered manageable by multilateral lenders for emerging economies.

“Ultimately, the rating trajectory will be informed by the incoming administration’s ability to stabilize and eventually reverse the deterioration in debt levels over the medium term,” Mr. De Guzman said.

Meanwhile, S&P Global Ratings Director YeeFarn Phua said they will keep a close eye on any sustained deterioration in the Philippine National Government’s fiscal and debt positions that will exceed their projections, as this will put downward risk on ratings.

“Though the current net debt to GDP is still well under 60%, we note that the quicker pace of debt increase is eroding fiscal buffers,” Mr. Phua said.

In the case of the Philippines, net debt takes into account the country’s liquid assets like social security assets and deposits at the central banks, he said. It also excludes government securities held by the national bond sinking fund.

For now, Mr. Phua said S&P’s “stable” outlook on the country’s “BBB+” rating assumes that the fiscal performance will improve on the back of the economy’s recovery from the pandemic.

It will be crucial for the incoming Marcos administration to implement measures that will bring down the budget deficit and continue economic reforms to avoid a possible downgrade of the country’s investment grade rating, analysts said.

Pantheon Macroeconomics Chief Emerging Asia Economist Miguel Chanco said rising debt-to-GDP will not be the lone determinant for the possibility of a ratings downgrade.

“What will matter more, though, is how quickly the new government can consolidate its budget deficit in the next one to two years, as the Philippines suffered one of the biggest budget blowouts in emerging Asia. Failure to make any progress could possibly result in more of the big three ratings agencies changing their outlook to ‘negative,’ from ‘stable,’” Mr. Chanco said in an e-mail.

In 2021, the budget deficit rose by 21.87% to P1.7 trillion, equivalent to 8.61% of GDP. For this year, the government has set a budget deficit ceiling of 7.7% of the economic output.

Tackling the growing national debt moving forward should be a priority for the incoming administration of Ferdinand R. Marcos, Jr., UnionBank of the Philippines, Inc. Chief Economist Ruben Carlo O. Asuncion said.

“Credit raters do have a long horizon before actually dropping any of their ratings except when they think that the situation in a particular economy has quickly deteriorated,” Mr. Asuncion said.

Since his landslide win in the May 9 presidential elections, Mr. Marcos has yet to announce his economic team or provide details on his economic plan.

Meanwhile, ING Bank N.V. Manila Senior Economist Nicholas Antonio T. Mapa said Fitch Ratings had noted concerns over the Philippines’ ability to lower its debt over time.

“Although we believe ratings agencies will give the new administration some leeway before potential credit rating action, we believe the longer our debt ratios stay above key thresholds, the more susceptible the Philippines will be to potential downgrades,” Mr. Mapa said in an e-mail.

In February, the debt watcher has maintained the “negative” outlook on the country’s “BBB+” rating, which opens up the possibility of a ratings downgrade in the next 12 to 18 months.

The country’s investment grade rating allows the government access to lower borrowing rates. It could also boost investor sentiment as it reflects the capacity of a government to pay back its debt.

Finance Secretary Carlos G. Dominguez III in April said the Philippine economy needs to expand above 6% annually in the next five to six years to reduce the country’s debt that ballooned during the pandemic.