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China Lianhe maintains Philippines’ AAA rating

CHINA LIANHE Credit Rating Co. maintained its “AAA” credit rating for the Philippines with a “stable” outlook, as it expects economic recovery to begin this year.

The government’s Investor Relations Office (IRO) said the affirmed rating signals the “highest level of confidence” on the country’s ability to pay its debt obligations despite the impact of coronavirus pandemic.

A stable outlook means the country’s rating is likely to be kept within the next 12 to 18 months.

“This latest rating action from Lianhe bodes well for the Philippines’ ability to continue accessing financing from Chinese investors, such as via sale of government bonds, at low interest rates,” IRO said in a statement.

Based on Lianhe’s credit rating methodology, an “AAA” rating reflects that a sovereign has extremely strong capacity to pay its financial commitments; is highly unlikely to be affected by adverse economic conditions; and has the lowest expectation to default on its debt.

Lianhe in a July 28 Philippine report said it expects the country to grow by around 7% for 2021 and 2022. The government set a 6-7% and 7-9% gross domestic product (GDP) growth for this year and 2022, respectively.

The Philippines’ GDP shrank by a record 9.6% last year, and by 4.2% in the first quarter.

The ratings agency noted that while the Philippines also suffered a pandemic-induced recession like many countries, its finances remained manageable due to revenues sourced through tax reforms prior to the crisis.

“Although the fiscal deficit widened further, government debt remained within acceptable threshold….Looking forward, the Philippines’ economic and fiscal performances are expected to recover in 2021 and 2022 on the back of gradually easing pandemic and continuous tax reforms,” Lianhe said.

It believes the strength of the Philippine economy is reflected through external indicators such as the resilience of cash remittances from overseas Filipino workers and receipts from the business process outsourcing industry. It also cited the country’s low external debt level and its capacity to pay such foreign obligations seen through ample current account receipts and foreign reserves.

“The debt structure of the Philippines remains relatively stable in 2020. Ample domestic liquidity has allowed the country to source from domestic markets to fund the majority of its financing requirements while minimizing foreign exchange risks. Domestic debts accounted for 68.3% of the total at end-2020,” the rating agency said.

Lianhe expects the country will return to its pre-pandemic growth path and fiscal consolidation when the pandemic subsides.

Finance Secretary Carlos G. Dominguez III said that while China accounts for a relatively small portion of the country’s outstanding debt, the affirmed “AAA” rating is an assurance of warm reception from the Chinese market for potential bond issuances.

In 2018, the Philippines raised RMB 1.5 billion ($230 million) through its maiden sale of Panda bonds which were oversubscribed by 6.3 times. This was followed by another issuance in 2019 when the country raised RMB 2.5 billion ($363 billion) through Panda bonds that were oversubscribed 4.5 times.

“The importance of fiscal discipline cannot be overly emphasized. Because of it, the Philippines has enjoyed creditor and investor confidence, which has led to favorable terms like lower interest rates on government borrowings and, therefore, more space in the national budget for vital expenditures like infrastructure, social services, and COVID-19 response,” Mr. Dominguez said.

In July, Fitch Ratings downgraded its outlook for the Philippines to “negative” from “stable,” which means the country’s investment grade “BBB” rating could be lowered in the next 12 to 18 months. Fitch noted the country’s medium-term growth outlook has deteriorated due to the possible impact of the pandemic.

Meanwhile, S&P Global Ratings in May affirmed its “BBB+” rating with a “stable” outlook for the country in May, citing expectations of a healthy economic recovery that will support the improvement of its fiscal standing.

Moody’s Investors Service last affirmed the Philippines’ “Baa2” rating with a “stable” outlook in July 2020. — Luz Wendy T. Noble

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