The Philippines retained its investment-grade credit rating from Moody’s Ratings. While a more favorable action would have been ideal, the New York-based agency cited several factors that influenced its decision to affirm the ‘Baa2’ score with ‘stable’ outlook.
Moody’s is known for its conservative stance on credit ratings. Among the three major international agencies, it has assigned the Philippines a rating just one notch above the minimum investment grade, similar to Fitch Ratings’ “BBB.” In comparison, S&P Global Ratings has rated the country two notches higher at “BBB+.”
On Friday, Aug. 23, Moody’s announced that it would maintain the country's rating, which has been steady since September 2022, citing some downside pressures on the economy.
A new concern raised by Moody’s in its latest report for the Philippines is the declining debt affordability, which the agency expects to continue weakening over the next two years.
Moody’s explained that this indicator, which assesses the government’s ability to borrow while ensuring it can meet repayment obligations without jeopardizing public services, may continue to weaken further, despite the expected decline in interest rates in the coming years.
In particular, Moody’s highlighted that the government’s interest payments—the costs associated with borrowing—are expected to increase to around 13 percent by next year, from 10.2 percent in 2022.
While these payments are expected to stabilize below 13 percent by 2026, Moody’s pointed out that this figure is still “relatively higher level compared with similarly rated peers.”
The debt watcher also pointed out that the fiscal consolidation under the Marcos administration is now progressing more slowly than initially expected, with the debt-to-gross domestic product (GDP) ratio projected to stay above pre-pandemic levels, though comparable to those of regional peers.
Additionally, Moody’s identified potential downside risks for 2024 to 2025, including the failure to enact proposed fiscal reform bills and the potential for increased public spending in the lead-up to next year’s mid-term elections.
In its assessment of the economy, Moody’s indicated that the Philippines’ robust growth potential is still being undermined by high poverty levels and unequal access to education and training opportunities for workforce upskilling.
If these challenges are not addressed, the rating agency cautioned that the country may struggle to attract foreign investment and diversify its export base into higher value-added sectors.
Moody’s also noted that these issues are compounded by the global rise of artificial intelligence, automation, and intensified competition from other countries.
In its Friday report, Moody’s also pointed out the ongoing maritime tensions between Manila and Beijing, saying that these disputes could disrupt trade and tourism, among other areas.
Nonetheless, Moody’s said that there is "a low probability" of significant escalation between the two countries about the contested territories in the West Philippine Sea.
Given these downside risks, Moody’s believes that a “stable outlook”—which indicates the future direction of its credit rating—remains appropriate.
A "stable outlook" means that Moody’s expects the Philippines’ ‘Baa2’ credit rating may remain unchanged in the next one to two years.
Nevertheless, Moody’s indicated that a credit rating upgrade could be possible if it sees clear signs of a quick improvement in fiscal and government debt metrics post-pandemic, coupled with a sustained rise in economic growth.