Debt-watcher Moody’s Ratings projects the Philippine debt burden to stay above pre-pandemic levels as weakening debt affordability and elevated funding costs weigh on government finances despite recent easing by the Bangko Sentral ng Pilipinas (BSP).

This also comes despite Moody’s affirmation that the government’s fiscal consolidation efforts are on track to meet the revised Medium-Term Fiscal Framework (MMTF), which aims to reduce the deficit to 4.3 percent of the country’s output by the end of the Marcos administration.

“Meeting the goal will be supported by reform measures at enhancing revenue collection and spending efficiency. This will drive a moderation in the government's debt burden, although it will remain above pre-pandemic levels,” Moody’s noted.

“Debt affordability, measured by the ratio of interest payments to revenue, is expected to weaken over the next two years, before gradually normalizing as global refinancing rates decline and economic growth returns to its long-term trend,” Moody’s said.

Moody’s further said that despite recent rate cuts, elevated government funding costs and a lag in monetary policy transmission will keep the interest burden higher in the near term.

The "baa" susceptibility to event risk score is driven by domestic political and geopolitical risk, incorporating a low probability of the emergence of domestic political stress and escalation of regional diplomatic tensions that could weigh on the country's economic and fiscal outlook.

Additionally, the Philippines’ fiscal strength, rated “ba1”, reflects the country’s heavy debt load, weakening ability to pay, and high share of foreign currency borrowings compared to investment-grade peers.

Its “baa” event risk score is mainly driven by political and geopolitical risks, with concerns that rising regional tensions could weigh on the country’s economic and fiscal outlook despite a low chance of domestic political stress, according to Moody’s.

Meanwhile, Moody’s said the government’s “Baa2” ratings shows it has strong access to domestic and international funding markets, as well as ample foreign-currency reserves to withstand volatility in global capital flows.

“These credit strengths are balanced against low per capita income, institutional constraints, and the sovereign’s high exposure to physical climate risks,” it said.

For its part, the BSP welcomed the credit rater’s “favorable assessment” of the country’s access to external financing.

“The Philippines has built ample reserves and policy space to absorb external shocks, allowing us to maintain stability even in times of global uncertainty,” said BSP Governor Eli M. Remolona, Jr.

As of end-July, the country’s dollar reserves reached $105.4 billion, enough to cover 7.2 months of imports and 3.4 times its short-term foreign debt.

Moody’s expects the Philippines to “maintain strong” output growth relative to its regional peers. To note, the Philippine gross domestic product (GDP) grew by 5.4 percent in the first semester of the year.

While this growth was in line with Moody’s full-year real GDP forecast of 5.7 percent, this falls short of the recently downscaled growth goal of 5.5 percent 6.5 percent.

“Growth will be supported by resilient household consumption, stable remittance inflows from overseas workers, public investment spending, and ongoing structural reforms,” Moody’s said .

However, “uncertainty around US [United States] trade policy and tariffs presents downside risks to domestic consumption and investment.”