Signs that the Philippine economy is recovering from an infrastructure-driven slowdown could prompt a one-notch credit rating upgrade to “A-,” even as debt watchers maintain their current assessments despite narrowing twin deficits.

Japanese investment and brokerage giant Nomura Holdings Inc. said in a Dec. 3 report that while the nation’s twin deficits—the fiscal deficit and the current account deficit—are shrinking, they remain sizable, a factor that currently bears no impact on credit ratings.

“S&P is likely to wait another year, and in our view, uncertainty remains high,” Nomura stated. “If a resolution to the corruption scandal is somehow reached and signs of an economic recovery emerge, a one-notch upgrade to 'A-' is possible; otherwise, the risk we see is that the outlook could be put back to 'stable' or even reduced to 'negative.’”

S&P Global Ratings Inc. affirmed the country’s BBB+ rating with a positive outlook on Nov. 27. The move extended the usual one-year review period for a potential upgrade, which followed last year’s unexpected shift to a positive outlook.

Nomura anticipates the fiscal deficit will narrow to 5.1 percent of gross domestic product (GDP) in 2026 from 5.5 percent, citing fiscal tightening. This would slightly outperform the 5.3 percent target set in the medium-term fiscal consolidation framework (MTFF) and be narrower than last year’s 5.7 percent deficit.

Public infrastructure spending has been a major propellant of both deficits in recent years, Nomura noted.

“So a relatively extended slowdown in the implementation of public works projects due to the controversy will help moderate these deficits,” the report said.

Despite the expected reduction, Nomura warned the fiscal deficit will remain wider than the 2.4 percent average seen before the pandemic.

Meanwhile, Nomura projects the current account deficit will narrow slightly to 3.7 percent of GDP from 3.9 percent, predicated on major infrastructure projects staying on track. Slower growth in goods exports is limiting further improvement.

The current account, which measures the country’s net foreign earnings from trade and overseas Filipino workers’ income, narrowed to around 3.1 percent of output in the first semester, down from four percent last year, according to recent reports.

The International Monetary Fund (IMF) forecast a narrower current account deficit of 3.8 percent this year and 3.5 percent next year. The Bangko Sentral ng Pilipinas (BSP) holds even narrower projections, seeing a 3.3 percent deficit this year and 2.9 percent for 2026.