Japanese debt rater sees aggressive public investment also aiding recovery
Japan-based debt watcher Rating and Investment Information Inc. (R&I) on Friday affirmed the Philippines’ “BBB+ with a stable outlook” credit rating, citing the country’s expected recovery through aggressive public investment.
“The Philippines’ economy suffered a severe contraction due to the Covid-19 (coronavirus disease 2019) pandemic in 2020 but is expected to recover primarily through aggressive public investment, which had driven the economy in the past several years. Fiscal and monetary policies will boost growth for some time,” R&I said in a statement.
BBB+ is a notch away from the minimum rating within the A-territory ratings, while a “stable” outlook indicates absence of factors that may cause the rating to change over the short term.
“With the government committed to maintaining fiscal discipline, the debt ratio will be back on a downward trajectory in the near future, in R&I’s view. In parallel with crisis responses, the government has steadily accomplished comprehensive tax reforms and various regulatory reforms,” said R&I.
R&I said the country’s current account balance also returned to a surplus, the risk associated with the external position is limited, and the banking sector remains stable.
“The current account balance returned to a surplus in 2020, thanks to a narrower trade deficit stemming from a sharp slowdown in economic activity. Surpluses in remittances from overseas workers and other accounts have held steady. Although the current account balance can move into a deficit again in tandem with economic recovery, R&I will not take a negative view of this as long as increased imports of capital and intermediate goods are the primary cause,” it said.
R&I also cited the relatively solid foreign direct investment inflows, the positive balance of payments, adding that foreign reserves are also greater than external debt.
“The country’s external liabilities exceed its external assets, but only slightly. R&I therefore considers the risk associated with the external position to be limited,” said R&I.
It added that while outstanding government debt is expected to go up to 57 percent in 2021, this is not a major issue due to the country’s “comfortable funding condition” on the back of ample domestic liquidity.
The aggressive infrastructure investment, R&I said, led to private consumption and investment’s increased contribution to economic growth.
It noted that enhanced productivity will also help bolster the country’s growth potential in the medium to long term. It pointed out, however, that attention should be given to downside risks as Covid-19 cases surged in the first quarter.
“With per capita gross national income rising at a steady pace, the Philippines is about to achieve an upper middle-income country status, which it has been striving for. According to medium-term projections by the International Monetary Fund, however, the country’s per capita GDP (gross domestic product) will still be low compared to other major Asean nations,” said R&I, referring to the Association of Southeast Asian Nations.
“This appears to reflect a small share of the manufacturing sector in employment and low productivity of the agricultural sector, among other factors. The Philippines’ medium-term development plan recognizes these two issues as policy agenda and calls for countermeasures,” it added.
In a joint statement, the Department of Finance and the Bangko Sentral ng Pilipinas welcomed the rating decision.
Finance Secretary Carlos Dominguex 3rd said R&I has “apparently taken notice that although the global fight against the pandemic has proven to be a costly one, the country’s strong macroeconomic fundamentals ahead of the pandemic have enabled the government to accelerate spending on urgent and necessary programs to save lives and keep the economy afloat.”
“With a manageable debt profile, a steady revenue stream brought about by tax reform, and the continued practice of fiscal prudence, the government is confident it will not run out of resources in waging the protracted battle against the Covid-19 crisis,” he added.
BSP Governor Benjamin Diokno said the Philippines once again earned an important vote of confidence on its ability to bounce back from the Covid-19 crisis.
“With the recent surge in Covid-19 cases, the tail-end of the crisis is proving to be extra challenging. Nevertheless, we do not see a permanent dent on our macroeconomic fundamentals, and we can head back to our growth path post-Covid,” said Diokno.
He said that while inflation may slightly breach the target range this year, it will ease to within the 2- to 4-percent target band next year.
“Moreover, the banking sector, although not totally unscathed, has kept the impact of the crisis manageable and remains well capable of helping support economic recovery and growth through credit,” said Diokno.
“The favorable inflation outlook and stable banking system, plus the speed of financial digitalization happening in the economy, are good reasons to be confident about the Philippines’ medium and long-term growth prospects,” he added.