Philippine credit downgrade imminent — ING

By Beatrice M. Laforga, 27 Aug 2021

The Philippines should brace for a credit rating downgrade next year after Fitch Ratings adjusted its outlook to negative from stable on dimming growth prospects, an economist from ING Bank N.V. Manila said.

“Should growth momentum stall and fiscal and external metrics deteriorate further over the coming months, the Philippines may be in line for a foreign currency credit rating downgrade by July 2022,” ING Bank Senior Economist Nicholas Antonio T. Mapa said in a note on Friday.

“An outright sovereign credit downgrade for either the Philippines or Indonesia would in some cases bring them to the edge of the investment grade universe (BBB-), one misstep away from a likely heavy sell-off should either of them lose their investment grade status,” he added.

The Philippines would likely fare worse than Indonesia, which expects its deficit to ease to 5.7% of economic output this year. On the other hand, the Philippines continues to struggle to contain its budget ceiling of 9.3%.

Mr. Mapa said the coronavirus upheaval threatens the government’s goal to keep its deficit cap and fiscal consolidation, with a debt stock at 60.4% of economic output of June.

A prolonged recession could result in long-term scarring effects that may prompt the government to further increase its spending, he said.

“We can expect rating agencies to monitor nations with slowing growth as this translates to soft revenues, wider fiscal deficits and ultimately higher debt levels,” he added.

After the economic grew by 3.7% in the first half, Philippine economic managers slashed their growth target for the year to 4-5% from 6-7% as the outlook dimmed.

Mr. Mapa expects the Bangko Sentral ng Pilipinas (BSP) to extend its debt financing scheme until next year due to the government’s widening deficit and to support economic rebound.

“This could complicate the central bank’s exit strategy as fiscal authorities become increasingly dependent on central bank financing,” he said.

In a separate note on Friday, Capital Economics Asia Economist Alex Holmes said the Philippines is headed for the opposite direction compared with its peers, as the country continues to suffer from a worsening COVID-19 outbreak. The threat of the Delta variant in other Southeast Asian economies appeared to have reached its peak.

He said this could push the BSP to bring down its key policy rates further next month.

Offshore, Mr. Mapa said the country is also bracing for a possible worsening of its current account, especially with the peso depreciating against the dollar as the US central bank taper its bond purchases and raise interest rates.