​Negative watch

PHILIPPINES - In Brief 13 Jul 2021 by Romeo Bernardo

---

Yesterday, FitchRatings revised to negative its outlook on the Philippine’s credit rating. The revision signals a possible downgrade of the sovereign’s “BBB” investment grade rating over a one- to two-year horizon.According to the published commentary,[1] the negative watch reflects “downside risks to medium-term growth prospects as a result of potential scarring effects, and possible challenges associated with unwinding the exceptional policy response to the health crisis and restoring sound public finances as the pandemic recedes.” While affirming the “BBB” rating based on “robust external buffers” and below peers’ projected government debt levels, Fitch noted the following sources of risks:Slower expected pace of economic recovery “set back by new highly transmissible variants and targeted mobility restrictions.” It reported a downscaled 5% GDP growth forecast for the year that “reflects low base effects.”Large increase in the public debt (from 34.1% of GDP in 2019 to a projected 52.7% and 54.5% in 2021 and 2022, respectively) that “exceeds the median increase for 'BBB' peers.” It also expects widening central and general government deficits due to higher spending needs to support economic recovery. While assuming policy continuity, it nevertheless cited “as yet unidentified spending or revenue measures” needed for fiscal consolidation to return deficits towards pre-pandemic levels. It observed that the 2022 presidential elections “create some uncertainty around the post-election fiscal and economic strategy” and that tax packages currently in the legislative mill still have uncertain medium term revenue impacts.It also highlighted other risks associated with increa...