The adverse impact of the prolonged pandemic will be short-lived, the government’s chief economic manager and the central bank governor said after Fitch Ratings downgraded the Philippines’ outlook to negative.
Finance Secretary Carlos G. Dominguez III said the significant impact of the coronavirus on the economy “will only be temporary,” while Bangko sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno said the drag caused by the pandemic is “transitory.”
Late Monday (July 12), Fitch adjusted its outlook from “stable” to “negative,” an indication that the rating agency is seeing risks that might result in downgrading the Philippines’ credit rating in the near future.
Among the downside risks cited by Fitch to the Philippines’ medium-term growth prospects is the weakened fiscal finances of the government as a result of the coronavirus pandemic.
However, the credit rater affirmed the country’s credit rating at “BBB,” which is one notch above the minimum investment grade.
Fitch noted that the general government deficit widened to 5.4 percent of gross domestic product (GDP) last year from only 1.7 percent in 2019. The rating agency expects the gap would further rise to 8.8 percent this year.
Fitch added that the nation’s fiscal finances have weakened, as it projects general government debt-to-GDP would rise to 52.7 percent and 54.5 percent in 2021 and 2022, respectively.
“The rise in the debt ratio from 34.1 percent n 2019 is large and exceeds the median increase for ‘BBB’ peers,” Fitch said.
Moreover, the London-based credit rater said the local economy has been hit particularly hard by COVID-19, contracting 9.6 percent last year. The pace of recovery in 2021 has been set back by new highly transmissible variants and targeted mobility restrictions, it added.
Fitch expects this year’s growth to be at 5.0 percent, below the government’s target of 6.0 percent to 7.0 percent.
In response to Fitch’s latest actions, Dominguez and Diokno said the Philippines’ economic recovery and strong medium-term growth prospects are on solid footing.
“The economy is already en route to a solid recovery path,” Dominguez said, citing the country likely grew by double-digits in the second quarter.
The finance chief added that the government is fast-tracking the implementation of the vaccine rollout to achieve “population protection” by having 70 million Filipinos inculcated by the end of the year.
“These upbeat growth projections take into account the continued relaxation of mobility restrictions, higher spending on COVID response and economic recovery programs,” Dominguez said.
On the fiscal front, he said the government would head back to the road of fiscal consolidation once the virus is contained and public spending normalizes to pre-COVID levels.
Meanwhile, Diokno said the green shoots of recovery would further strengthen as the government accelerates the vaccination program and implements recovery measures.
“We recognize that there are risks to our growth outlook. However, our solid fundamentals and ongoing reform initiatives should carry us through toward a solid rebound—to a state that is well-calibrated to the emerging new economy,” Diokno said.
He added that the central bank has its long list of COVID-response measures, including monetary actions that have helped maintain liquidity in the financial system at a critical time.
“We will continue to support the economy as needed, mindful of the negative consequences of premature disengagement of our response measures,” Dioko said. “Moreover, our financial digitalization agenda should help move the Philippines to new heights.”
The latest rating decision from Fitch came after another international debt watcher, S&P Global, affirmed in May the Philippines’ “BBB+” rating with a “stable” outlook.
The country’s rating with S&P is one step higher than that of Fitch. The “stable” outlook indicates that the upside and downside risks to the rating are balanced and that the rating is unlikely to change within the short term.
Moody’s Investors Service, on the other hand, assigns a “Baa2” rating to the Philippines, with a stable outlook. At this level, Moody’s rating is on par with Fitch’s’ “BBB” rating.