S&P affirms Philippines’ investment grade rating

AN AERIAL VIEW shows the Ortigas business district in Pasig City, June 10. — REUTERS

S&P GLOBAL RATINGS affirmed on Thursday the Philippines’ investment grade rating, amid the economy’s continued recovery from the pandemic.

“The Philippines’ economy is rebounding healthily, spurred by strong domestic demand as the country lifts mobility restrictions and fully reopens… We affirm our ‘BBB+’ long-term and ‘A-2’ short-term sovereign credit ratings on the Philippines,” it said in a statement.

The credit rater said it kept a “stable” outlook, reflecting expectations of economic recovery and a significant decline in the fiscal deficit in the next two years.

Under S&P’s global rating scale, “BBB+” is considered an investment grade rating, and reflects a sovereign’s “adequate capacity to meet financial commitments, but more subject to adverse economic conditions.”

The “BBB+” sovereign rating is a notch away from the “A”-level grade targeted by the government, while a “stable” outlook means the rating is likely to be maintained in the next six months to two years. 

S&P last affirmed its credit rating for the country in May 2021 with the same “stable” outlook.

“The sovereign credit 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.

S&P noted the Philippines has entered the endemic phase of the coronavirus with economic activities now normalizing. Gross domestic product (GDP) growth averaged 7.7% in the first three quarters, driven by strong domestic demand.

However, the debt watcher expects GDP expanding by 6.3% this year, a tad below the government’s 6.5-7.5% GDP growth target.   

For next year, S&P expects growth at 5.7% amid a global economic slowdown, particularly in the US and China. This is below the government’s 6.5-8% goal.

“Nonetheless, economic growth should be well above the average for peers at a similar level of development, on a 10-year weighted average per capita basis. The country has a diversified economy with a strong record of high and stable growth. This reflects supportive policy dynamics and an improving investment climate,” it said.   

It added that Philippine GDP per capita could rise to $3,640 this year and $3,838 next year. Real GDP per capita growth could average about 4.6% each year over 2023-2025.

S&P said the economic recovery would help improve the Philippines’ fiscal position, which has deteriorated during the pandemic.

“However, the fiscal position will likely take longer than our forecast period to recover to pre-pandemic levels,” it said.

S&P forecasts the Philippines to bring down its general government deficit to 5% of GDP this year, from 6% in 2021. The central government deficit is also seen to narrow to 7.2% of GDP this year, against the national budget’s estimate of 7.6%.

However, the government’s efforts to provide support measures countering elevated inflation may hamper an improvement in fiscal outcome, S&P said.

“The fiscal shortfall should continue to narrow over the coming years while the economy regains its footing and the government scales back stimulus measures,” it added.

The Philippines may face difficulty in restoring the fiscal and debt settings to pre-pandemic levels in the next 12 months to two years due to rising inflation, tightening monetary policies and supply chain disruptions, S&P said.

The Philippines’ debt-to-GDP ratio stood at a 17-year high of 63.7% as of the third quarter, well above the internationally recommended threshold of 60%.

Inflation climbed by 7.7% year on year in October, the fastest in nearly 14 years and exceeded the central bank’s 2-4% target for a seventh straight month. It averaged 5.4% in the 10-month period.

To tame inflation, the Bangko Sentral ng Pilipinas (BSP) has raised borrowing costs by 300 basis points (bps) this year, including its 75-bp rate hike on Thursday. This brought the benchmark policy rate to 5%.   

Meanwhile, S&P said it might upgrade the Philippines’ credit rating if the economy recovers faster than expected and the government achieves “more rapid fiscal consolidation.”

“We may also raise the ratings if institutional settings, which contributed to a significant enhancement in the Philippines’ pre-pandemic credit metrics over the past decade, further improve,” it said.

However, S&P cautioned that a downgrade is possible if the Philippines’ recovery falters, which could lead to a “significant erosion” of the long-term growth trend.

“Indications of downward pressure on the ratings would be a sustained annual change in the net general government debt that is higher than 4% of GDP and the general government net debt stock exceeding 60% of GDP, or interest payments exceeding 15% of revenue on a sustained basis,” it said.

S&P said the “persistently large” current account deficits are another downside risk to the Philippines’ credit rating.

In the first semester, the current account balance hit a $12-billion deficit, widening from the $1.3-billion gap a year earlier.

“We believe deficits will persist over the forecast years as capital imports rebound alongside the economic recovery and higher commodity prices prevail,” the debt watcher said. 

“Nevertheless, current account deficits should moderate in the outer years. This is because competitive unit labor costs relative to peers such as Thailand and Indonesia, combined with a large, young, educated and flexible labor force should further strengthen the Philippines’ service exports,” it added. — Keisha B. Ta-asan