Fitch Ratings said Monday it affirmed the Philippines’ investment grade score of “BBB” with a stable outlook, citing the country’s resilience amid the global pandemic and strong growth outlook that may hit around 6.9 percent in 2021 and 8 percent in 2022.
“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.
It said the economic impact of the pandemic for the Philippines in 2020 was more significant than it had previously expected because of the domestic infection rate and government policy measures to curb the spread of the virus.
Fitch said efforts to contain the virus severely affected private consumption and investment, resulting in real GDP contracting by 10 percent year-on-year in the first nine months of 2020. It said full-year GDP likely contracted by 8.5 percent in 2020, after accounting for an improvement in activity indicators in the fourth quarter.
Fitch said economic activity might continue to recover in the coming quarters. It projected GDP to expand by 6.9 percent and 8.0 percent in 2021 and 2022, respectively.
“We estimate the general government deficit to have widened to 6.9 percent of GDP in 2020 from 1.2 percent of GDP in 2019. We project the deficit to widen further to 7.7 percent in 2021, before narrowing to 6.6 percent in 2022. Underlying the projections for 2021 are a central government deficit of 8.7 percent of GDP, up from an estimated 7.5 percent of GDP in 2020, as government expenditure aimed at supporting economic recovery is likely to remain high,” it said.
The wider deficits, it said, reflected the authorities’ policy response to COVID-19 under their four-pillar socio-economic strategy.
Bangko Sentral ng Pilipinas Governor Benjamin Diokno said he appreciated Fitch’s understanding of the Philippines’ credit and macroeconomic direction amid the global pandemic.
“For our part, the BSP was among the first central banks in the world to respond to the crisis with a policy rate cut as early as February last year. 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,” Diokno said.
Finance Secretary Carlos Dominguez III said the affirmation of the Philippines’ “BBB” rating with a stable outlook showed that the country remained credit and investment-worthy throughout the global COVID-19 crisis.
“This is because, first, our strong economy on the Duterte watch gave us enough fiscal space to deal with the unprecedented health and economic crises. Second, there is a whole-of-government approach in saving lives, protecting communities and livelihoods, and providing relief to the hardest hit families, workers, and businesses,” Dominguez said.
Dominguez said that as soon as the pandemic struck in early 2020, the Duterte administration came up with and shepherded the swift congressional passage of twin legislation [Bayanihan 1 and 2] designed to beef up the healthcare infrastructure, extend the biggest emergency subsidies ever to poor families and dislocated workers and provide relief to businesses, especially micro, small, and medium-sized enterprises.
Fitch said the Philippines entered the crisis with robust public finances, given its relatively low general government debt ratio of 34.1 percent of GDP in 2019.
“The pandemic shock has eroded this strength, as we estimate the debt ratio to have risen to 48 percent of GDP in 2020, and anticipate it will rise further and peak at around 55 percent in 2022 [against a projected ‘BBB’ median of 56.6 percent],” it said.
Fitch said it would 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 would be an important consideration for the rating over the medium term.
“The authorities have maintained progress in their infrastructure program despite disruptions from the coronavirus. According to official estimates, spending on infrastructure reached about 4.5 percent of GDP in 2020, slightly below the 2019 level of 5.4 percent, and is forecast to rise again to about 5.9 percent in 2021,” it said.
The authorities financed the higher budget deficit in 2020 through a combination of domestic and external financing, with a borrowing mix of 76 percent-24 percent, in favor of the former.
The BSP authorized the use of a repurchase agreement with the Bureau of the Treasury of P300 billion (1.5 percent of 2020 GDP) on a short-term basis to finance the government’s urgent COVID-19-related financing needs and this was paid back to the BSP in September 2020.
An additional P540 billion (2.7 percent of 2020 GDP) in the form of a provisional advance of three months maturity has recently been renewed by the BSP, within existing provisions of the BSP charter.
“The Philippines’ external finances remain a credit strength. Foreign-currency reserves remain high and gross external debt levels are manageable. Foreign exchange reserves are estimated to have increased to about $105 billion by end-2020 from $90 billion in 2019, supported by proceeds from global bond issuances and disbursements from multilaterals for pandemic-related spending,” it said.