FOLLOWING Fitch Ratings’ latest move to revise its outlook on the Philippines to negative on Monday, the government’s economic managers expressed confidence that the pandemic’s effect on the economy is just “transitory.”
The Senate Finance panel chief deemed the revision a “cause for concern” but said there are several steps the Philippines can take to redress this.
Private economists warned of further negative actions from Fitch and from other agencies if the country fails to control the number of Covid-19 cases in the country and its effect on the economy.
In a statement from the Investment Relations Office (IRO) after Fitch’s statement, Bangko Sentral ng Pilipinas (BSP) Governor Benjamin Diokno came to the defense of the economy, saying the drag caused by the pandemic to the Philippine economy is expected to be transitory.
“The sharp economic contraction last year was caused primarily by strict containment measures to prevent the spread of the virus, save lives and increase the capacity of the
healthcare system. When the daily tally of cases showed a sustained decline and the government started to relax the mobility restrictions, the surveys showed the economy was able to generate jobs quickly,” Diokno said.
“As the government accelerates the vaccination program and implements recovery measures, we expect the green shoots of recovery to further strengthen and the economy to return to its robust growth path. Of course, we recognize that there are risks to our growth outlook. However, our solid fundamentals and ongoing reform initiatives should carry us through toward a solid rebound—to a state that is well-calibrated to the emerging new economy,” the BSP governor added.
Finance Secretary Carlos Dominguez echoed this statement and expressed confidence that the country’s fiscal side remains strong and resilient amid the pandemic.
“Although the negative impact of the pandemic on the Philippines has been significant, this will only be temporary. In fact, the economy is already en route to a solid recovery path and is seen to have posted double-digit growth in the second quarter of this year amid the fast-track implementation of the vaccine rollout and economic recovery measures,” Dominguez said.
Economic managers expect the country to grow between 6 and 7 percent this year and 7 to 9 percent next year.
“These upbeat growth projections take into account the continued relaxation of mobility restrictions, higher spending on Covid response and economic recovery programs, and the faster rollout of the mass vaccination program. We target to achieve ‘population protection’ by having 70 million Filipinos, or 100 percent of our adult population, inoculated by the end of this year,” Dominguez said.
On Monday, Fitch also said while supplies of vaccination have been coming to the country in recent months, these may not be enough to reach the government’s target.
“The authorities aim to vaccinate up to 70 percent of the eligible population by end-2021, which Fitch views as ambitious because under 3 percent of the population was fully vaccinated as of the end of June,” Fitch said.
ING Bank, RCBC experts
In a separate analysis, ING Bank Manila economist Nicholas Mapa said Fitch’s outlook revision reflects the growing attention ratings agencies are likely giving to the protracted rise in Philippine debt while recognizing the “slowing momentum of the economic engines.”
“Despite showing some green shoots, the overall growth trajectory is likely less vibrant compared to pre pandemic levels as consumption remains constrained by high unemployment and investments are held back due to poor sentiment,” Mapa said.
“If trends continue we could see other ratings agencies follow suit in the next three months with a possible downgrade by year end if fiscal metrics worsen further,” he added.
Rizal Commercial Banking Corporation (RCBC) economist Michael Ricafort, meanwhile, said Fitch’s decision could lead to some adjustments on the risk premiums in the Philippines in terms of some uptick in local interest rates/credit costs and some healthy profit-taking in the local financial markets.
He hoped, however, these would be minimal or negligible, since there is still a chance to prevent an actual downgrade of the credit rating in the coming months.
Ricafort said the country could avert seeing the outlook fully turn into a downgrade if economic recovery prospects improve with more vaccine arrivals to better manage, if not reduce, new local cases, and justify additional measures to reopen the economy.
“These would help increase the government’s tax revenue collections, reduce the government’s spending on social amelioration, financial assistance, and other Covid-19 programs, and in turn, help…narrow the country’s budget deficit and slow the growth in the country’s debt stock, while faster economic recovery/growth would help reduce the country’s debt-to-GDP ratio in the coming months/quarters,” the economist said.
Overall, Fitch said a sustained rise in the government or debt-to-GDP ratio associated, for example, with a reversal of reforms or departure from a prudent macroeconomic policy framework could push the negative outlook to a full downgrade of the country’s rating.
The ratings agency also said weaker medium-term macroeconomic prospects combined with diminishing policy credibility and a deterioration in external indicators could also invoke a negative action.
Still a vote of confidence
Despite the negative outlook, the credit rating of BBB given by Fitch Ratings remains a vote of confidence in the Philippine economy, according to the National Economic and Development Authority (Neda).
Socioeconomic Planning Secretary Karl Kendrick T. Chua told reporters on Tuesday the negative outlook highlighted the risks the economy faced due to the pandemic.
However, Chua said, they will endeavor to open the economy safely and manage the risks from Covid-19 while speeding up vaccination efforts to boost the country’s economic prospects.
“The rating kept at BBB is a vote of confidence in the country’s economic and fiscal management despite the worst effects of the pandemic,” Chua said.
“The negative outlook flags the risks that we are aware of, and the economic team will continue to exert effort to open the economy safely, manage risks from Covid [and] accelerate vaccine deployment,” Chua said.
Angara: Cause for concern
Senator Juan Edgardo Angara, the chairman of the Senate Finance committee, acknowledged on Tuesday Fitch’s revision of its outlook on the Philippines is “definitely a cause for concern.”
However, Angara quickly asserted that “we can probably do something about the situation.”
Angara acknowledged the basis for Fitch’s revision of its outlook, noting that, “Economic recovery has been slower than expected so government can help the recovery by pump priming and taking up the slack in activity of the private sector.”
The senator suggested “more robust public sector spending starting with the 2021 budget implementation and fast-tracking any applications of the private sector that are pending with any government agencies.”
Angara added: “We are dependent on the vaccine rollout for our recovery but there are ways to speed this up if all hands are on deck, so to speak.”
Image courtesy of Nonoy Lacza