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S&P affirms Philippines’ BBB+ rating

S&P GLOBAL RATINGS on Thursday kept its “BBB+” rating on the Philippines and assigned a “stable” outlook on expectations of a “healthy” economic recovery, which will help improve the country’s fiscal standing that has weakened because of the coronavirus crisis.

“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,” S&P said in a statement on Thursday.

The current “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 also maintained its A-2 short-term credit rating for the Philippines, while the outlook on long-term rating is still stable.

The debt watcher last affirmed its credit rating for the country in May 2020 with the same “stable” outlook.

S&P said the economy has shown signs of recovery and is expected to rebound as the government continues its vaccine rollout and as the virus’ spread is contained, backed by its strong external position as well as ongoing fiscal and infrastructure reforms.

The debt watcher sees the Philippine economy expanding by 7.9% this year versus last year’s 9.6% contraction and the government’s 6-7% gross domestic product (GDP) growth target. For next year, S&P expects GDP to grow by 7.2%.

“The Philippines has been one of the worst affected economies in Asia-Pacific by the COVID-19 pandemic… The economic recovery is 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% 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,” S&P said.

“Wider vaccine deployment will allow economic activities to normalize more quickly toward the end of the year.”

The debt watcher noted that the Philippines remains among the fastest growing in the world, and its rating reflects the country’s “above-average economic growth potential.”

“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,” the credit rater said. “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.”

S&P said the government’s fiscal prudence and reforms in recent years also served as a buffer to temper the impact of the pandemic on its debt profile.

“The Philippines government has generally enacted effective fiscal policies over the past decade, marked by improvements to the quality of expenditure, manageable fiscal deficits, and low levels of general government indebtedness. This track record of sustainable public finances helped the government accumulate fiscal space to respond to the pandemic,” the debt watcher said.

“Ongoing efforts to close infrastructure gaps and further improve the business climate through regulatory and tax reforms should also support the Philippines’ economic productivity.”

S&P sees the country’s current account surplus to slowly narrow in the coming years on the back of higher capital imports and the expected economic recovery.

It added that the country may see inflows of foreign direct investments recovering this year as the sustained vaccine rollout eases concerns over the crisis and help economic activities to normalize.

“We regard the BSP’s (Bangko Sentral ng Pilipinas) ability to support sustainable growth while attenuating economic or financial shocks to be broadly neutral to our rating. This reflects the central bank’s sound record in keeping inflation low and its history of independence,” it added.

Meanwhile, S&P said the country’s institutional capacity has been challenged by the pandemic, with the government still recalibrating its policies to lessen the impact of COVID-19 restrictions on the economy.

The upcoming presidential election in 2022 is also a source of uncertainty, but the credit rater said it expects policy continuity.

“Nevertheless, it will be challenging to restore the fiscal and debt settings to pre-COVID-19 levels over the next 12-24 months. Additional downside economic risks stem from uncertainties surrounding the course of the pandemic and the emergence of new coronavirus variants around the world,” it added.

S&P said it may upgrade the Philippines’ credit rating over the next two years if the economy expands faster than expected and the government achieves fiscal consolidation immediately.

“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.

However, S&P warned that a downgrade is possible if the country’s recovery falters, which could cause the government’s fiscal position to deteriorate.

Economic managers said S&P’s rating action shows continued confidence in the Philippines’ recovery prospects.

“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,” BSP Governor Benjamin E. Diokno said in a statement.

Finance Secretary Carlos G. Dominguez III meanwhile said the government will continue implementing structural reforms to support the economy and further open up sectors to foreign investments.

“Even as we significantly increase public spending to contain the spread of the virus, 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,” Mr. Dominguez said. — Beatrice M. Laforga

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