Fitch maintains PH’s investment grade credit rating despite escalating debt
MANILA, Philippines — Despite a pandemic-induced 16-year high public debt ratio, the Philippines’ investment-grade credit rating has been retained by leading debt watchdog Fitch Ratings as the economy recovers.
The ‘BBB’ rating – one notch above minimum investment grade – was maintained on February 17, alongside a ‘negative’ outlook, meaning the current rating could be downgraded.
In its report, Fitch said the Philippines’ unchanged credit rating “balances strong external buffers and growth against lagging structural indicators, including per capita income and governance.”
“It also reflects low government revenue mobilization relative to its peers and the public debt-to-GDP ratio [gross domestic product ratio] which has risen sharply from pre-COVID-19 levels, but is expected to remain near the ‘BBB’ median for the next several years,” Fitch said.
The share of the national government’s outstanding debt to the economy fell from a record high of 39.6% in 2019 to 60.5% in 2021, as it relied heavily on borrowing mainly from sources to fund the COVID-19 response when incomes declined due to the induced pandemic. recession at the height of the strictest lockdowns two years ago.
But credit rating agencies, like Fitch, take a closer look at general government debt – the combined bonds of national government, local governments and social security institutions, minus their holdings of bonds.
“The Philippines’ debt trajectory will depend on the balance of ongoing fiscal consolidation and government spending to support economic recovery,” Fitch said.
“We expect the public debt-to-GDP ratio to reach 54.5% in 2022 and then decline to 53.1% in 2023, from around 54% in 2021 (and 48.1% in 2020),” he said. declared.
“This is still below our median ‘BBB’ forecast of 55.3% in 2022 and 56.6% in 2023. However, we expect the debt-to-income ratio of 278.7% in 2022 to exceed the median ‘BBB’ “by 257%” Fitch added.
Finance Secretary Carlos Dominguez III, quoted in a Bangko Sentral ng Pilipinas (BSP) statement on Friday, said that “given years of fiscal prudence, the increase in debt due to the pandemic has not prevented the country to have a favorable debt structure and broad access to low-cost financing.
The BSP cited Fitch’s estimates showing that general government interest payments as a share of general government revenue amounted to 9% last year.
“The government has taken on the enormous cost of responding to the COVID-19 crisis to help vulnerable sectors survive and recover from the crisis, thanks in large part to President Duterte’s comprehensive tax reform program and its policy of prudent budget management and discipline,” said Dominguez. .
“But we are also concerned about not passing on unsustainable debt to future generations,” he said.
“Estimated to have reached around 54% of GDP in 2021, public debt remains manageable, and we expect it to remain at around the same level this year and next,” added Dominguez.
Fitch also attributed the negative outlook to “uncertainty about the medium-term growth outlook as well as possible challenges in unraveling the policy response to the health crisis and putting public debt on a firm downward path.”
Fitch said he expects the Philippine economy to grow 6.9% this year and 7% next year, supported by “increased vaccination rates, lower infection numbers to COVID-19, [and] normalized economic activity – especially in services – after strict containment measures in 2020 and part of 2021.”
“Fiscal and monetary policy response, strong infrastructure spending, and resilient remittances and exports are also driving the recovery,” Fitch added.
However, Fitch pointed to lingering downside risks to the economic recovery, such as the prolonged pandemic and possible waves of infection from novel variants of COVID, and the pandemic-related scarring effects on medium-term growth prospects. .
“The presidential elections scheduled for May 2022 also create uncertainty around post-election fiscal and economic strategy, although we assume that broad political continuity will be maintained given the Philippines’ record of a generally strong political framework,” said Fitch.
Bangko Sentral ng Pilipinas Governor Benjamin Diokno said “the Philippine economy is on the right path to recovery as Fitch affirmed our ‘BBB’ investment grade credit rating amid a wave of downgrades in many other countries”.
“The BSP expects the continued acceleration of credit activity and the favorable inflation outlook to support the growth outlook,” Diokno said in a tweet.
“In our first monetary policy report, the Monetary Board kept the policy rate at a record high of 2% to support the continued economic recovery,” he said.
“The Philippine banking system has managed the impact of the crisis,” Diokno said.
“Philippine banks continue to meet the growing demand for credit. We also expect inflation to stay well within the target range of 2-4% this year through 2024, which will provide a conducive environment for consumption and investment,” he added.
Credit ratings are a measure of a government’s creditworthiness. Since the stability of public finances was also linked to the performance of a country, credit ratings serve as a proxy indicator of the economy.
Better ratings would allow the government to charge lower rates when it borrows from lenders, which could mean lower interest rates for consumers and businesses borrowing from banks using debt securities. issued by the government as a reference for their loans.
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