Fitch to evaluate PH credit rating following 16.5% GDP contraction in second quarter

Fitch Ratings said it will reevaluate the credit rating outlook for the Philippines after the government announced that the gross domestic product shrank 16.5 percent in the second quarter from a year ago.

“The Philippines’ near-term growth outlook has continued to deteriorate as a result of the ongoing coronavirus pandemic and imposition of modified lockdown measures in and around metro Manila. The government’s projections of the fiscal deficit have correspondingly widened” Fitch Ratings associated director Sagarika Chandra said.

“We anticipated some deterioration in the Philippines’ credit metrics as a result of the pandemic in our last rating review, when we revised the outlook…and affirmed the rating at ‘BBB’,” Chandra said.

“We noted at that time that the economic projections were uncertain and subject to considerable downside risks depending on how the virus runs its course globally and domestically and the possibility of a further extension or re-imposition of lockdown measures. Given the Philippines’ difficulty in containing the virus, these downside risks are materializing and our current growth forecast of -4 percent for 2020 now seems optimistic and is likely to be revised down,” he said.

Fitch said the Philippines entered the crisis with fiscal buffers given its low general government debt ratio of 34.1 percent of GDP in 2019 compared to ‘BBB’ peer median of 42.2 percent.

“These buffers are being eroded given the impact of the pandemic, but there is still some room at the Philippines’ rating level to accommodate some deterioration in the fiscal outlook. In particular, we now estimate the general government debt ratio to rise to around 48 percent of GDP in 2020, still below the projected peer median of 51.7 percent,” it said.

“In our ongoing monitoring of developments, we will assess the likelihood that after the coronavirus shock subsides the fiscal deficit and public debt trajectory will be restored in line with the authorities’ medium-term framework. We will also assess the extent to which the crisis may impact the Philippines’ strong medium-term growth potential, which has been a support for the rating,” Fitch said.

Bangko Sentral ng Pilipinas Governor Benjamin Diokno, however, shrugged off the possibility of credit rating agencies downgrading the investment grade of the Philippines following the 16.5-percent GDP contraction in the second quarter.

“Highly unlikely. From January to June, the rating agencies [Fitch, Moody’s and S&P] have downgraded 82 sovereigns, revised to negative outlooks 104 sovereigns. The Philippines is not one of them. The rating agencies have affirmed the RP’s investment grade ratings and outlook,” Diokno said in a text message to Manila Standard on Friday.

He said the sharp fall in Q2 growth was not posing a danger to the Philippines’ strong macroeconomic fundamentals, such as the relatively low debt-to-GDP ratio, one of the highest tax efforts in the region; benign inflation and well managed inflation expectations, strong peso, hefty gross international reserves and well-capitalized banking system with low non-performing loans.

Diokno said economic managers viewed the economy’s plunge—the lowest since 198—as temporary resulting from the strict and comprehensive lockdown.

“But the recovery process is on its way and we expect a strong rebound of 6.5 percent to 7.5 percent in 2021. We should look beyond the current crisis. We should craft a strong economic recovery program accompanied by more structural reforms that would allow the Philippines to rebuild better for the future,” Diokno said.

Topics: Fitch Ratings , gross domestic product , Fitch Ratings , Sagarika Chandra
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