S&P Global Ratings on Thursday affirmed the investment-grade ‘BBB+’ long-term and ‘A-2’ short-term sovereign credit ratings on the Philippines, with a stable outlook.
“We affirmed the ratings because we believe the Philippines will continue to have good economic recovery prospects once the COVID-19 pandemic is contained, and that the government’s fiscal performance will strengthen accordingly,” the debt watcher said.
“The stable outlook reflects our expectation that the Philippines economy will recover to healthy rates of growth as the COVID-19 pandemic is better contained, and that the government’s fiscal performance will materially improve,” S&P said in a statement.
It said the country’s fiscal deficits were expected to decline significantly over the next two to three years.
The Philippines’ “BBB+” rating with S&P is the highest among its ratings with international debt watchers. The country is rated one notch lower at “BBB” by Fitch Ratings and its equivalent Baa2 by Moody’s Investors Service.
It is also a step away from the minimum rating within the stellar “A” territory. The “stable” outlook indicates the absence of factors that could trigger an upward or downward adjustment in the rating over the short term.
Welcoming the rating affirmation by S&P, Finance Secretary Carlos Dominguez III said: “The Philippines, along with the rest of the world, has suffered from the shocks of the pandemic-driven health and economic crises. But solid financial buffers and prudent fiscal management have placed the Philippines in a relatively strong position to generate the needed funds for COVID-19 response without touching off a worrisome debt situation down the road.”
“Even as we significantly increase public spending to contain the spread of the virus, save lives, and induce economic recovery, we have managed to keep our debt metrics within manageable levels. S&P’s affirmation of its ‘BBB+’ rating supports our optimism that once this health emergency is contained, we will be able to bring back our deficit and debt ratios as well as our growth momentum to pre-pandemic levels,” he said.
From 34.1 percent in 2019, the Philippines’ general government debt as a percent of GDP, per S&P’s estimates, increased to 48.8 percent in 2020. This is much lower than S&P’s estimate for Malaysia’s (A-) at 74.6 percent, and comparable with Thailand’s (BBB+) 48.1 percent and Indonesia’s (BBB) 38.6 percent.
“Moreover, our continued implementation of game-changing reforms while our hands are full with COVID response measures speaks well of our government’s resolve to achieve President Duterte’s goal of a stronger and more inclusive economy in the post-pandemic era," Dominguez said.
He said the recently signed Corporate Recovery and Tax Incentives for Enterprises law, which cuts the corporate income tax rate to a level that is competitive regionally and that rationalizes the fiscal incentives regime, would provide succor to businesses reeling from the COVID-19 crisis. This would help attract more foreign and domestic investments that would, in turn, create more jobs and boost incomes of Filipinos, Dominguez said.
“We are also actively pushing the passage of other important economic bills that will further open the economy to investments and accelerate economic recovery. In particular, we are keen to see the passage of the proposed investor-friendly amendments to the Foreign Investments Act, Public Service Act and the Retail Trade Liberalization Act," he said.
Bangko Sentral ng Pilipinas Governor Benjamin Diokno said: “The move of S&P to keep the country’s BBB+ credit rating echoes our view that the impact of the COVID-19 crisis on the economy will be transitory and that the Philippines continues to enjoy bright medium-term growth prospects.”
“Prior to the pandemic, the Philippines was already on the verge of becoming an upper middle-income economy and had already posted significant strides in poverty reduction. We expect to go back to that trajectory soon, as vaccination rollout continues and as we push for vital economic reforms," Diokno said.
“On the part of the BSP, we will continue to promote financial digitalization, which will aid faster economic recovery and growth, and which will onboard more Filipinos to the formal sector thereby boosting incomes. We will likewise continue to promote Islamic banking for a more inclusive financial system," he said.
“We will also remain steadfast in our commitment to price stability, prudent supervision of financial institutions under our remit, stability of the financial system, and efficient payments and settlements system—all of which help provide an enabling environment for faster and more inclusive growth," Diokno said.
S&P said the Philippine economy was beginning to recover, and growth should accelerate further in 2022 as the pace of COVID-19 vaccinations picks up and the pandemic becomes more contained.
It said while the country’s debt and fiscal metrics weakened amid the severe pandemic-driven downturn, “we expect stabilization and improvement on these fronts as the economy recovers.”
S&P said it might lower the rating if the Philippines’ nascent economic recovery falters over the next 24 months, leading to a significant erosion of the long-term trend growth rate, or an associated deterioration of the government’s fiscal and debt positions beyond our projections.
“Indications of downward pressure on the rating would be a sustained annual change in net general government debt higher than 4 percent of GDP and the general government’s net debt stock exceeding 60 percent of GDP, or interest payments exceeding 15 percent of revenues on a sustained basis,” it said.
It said the rating might be raised over the next two years if the economy recovers much faster than expected, and the government achieves more rapid fiscal consolidation. “We may also raise the rating if the institutional settings, which have contributed to a significant enhancement in the Philippines’ pre-pandemic credit metrics over the past decade, further improve,” it said.
S&P said the ratings on the Philippines reflect the country’s above-average economic growth potential, which should drive constructive development outcomes and underpin broader credit metrics. It said that while the government’s fiscal and debt settings deteriorated due to the economic fallout from the COVID-19 pandemic and the associated extraordinary policy responses, its long track record of fiscal prudence provided a buffer to key metrics.
“The ratings also benefit from the economy’s sound external settings. These factors are weighed against the Philippines’ low GDP per capita relative to other investment-grade sovereigns and evolving institutional settings,” it said.
It noted that the Philippines was one of the worst affected economies in Asia-Pacific by the COVID-19 pandemic. The economy contracted by a record 9.5 percent in 2020 and economic recovery was off to a slow start in 2021, partially owing to a severe COVID-19 wave centered in Luzon.
“But we expect real GDP growth to rebound strongly to 7.9 percent in 2021. This will be largely due to base effects, but will also be driven by wider deployment of vaccines, a recovery in the global economy, and the government’s expansionary fiscal measures. Wider vaccine deployment will allow economic activities to normalize more quickly toward the end of the year,” it said.
“Despite the unprecedented economic shock, the Philippine economy remains among the fastest growing in the world on a 10-year weighted-average per capita basis. The country has a relatively diversified economy with a strong track record of high and stable growth—a reflection of its supportive policy dynamics and improving investment climate,” it said.
S&P expects the GDP per capita in the country to rise to almost $3,640 in 2021 (including nonresident nationals in population data) and the real GDP per capita growth to average 6 percent per year over 2021 to 2024.
“The Philippine economy’s constructive medium-term trajectory is underpinned by solid household and company balance sheets, sizable inward remittance flows, and an adequately performing financial system. Prior to the outbreak of COVID-19, the country’s unemployment rate had been declining for a few years, signaling a strengthening labor market even as the working-age population continued to grow,” it said.
