Moody’s affirms Philippines’ ‘Baa2’ rating, ‘stable’ outlook

July 16, 2020

Moody’s Investors Service affirmed the Philippines’ credit rating of “Baa2” with a “stable” outlook—a vote of confidence on the ability of the economy to cushion the effects of COVID-19 and to post a solid recovery over the near term.

The affirmation of the Philippines’ “Baa2” rating with a “stable” outlook  comes amid a series of credit rating downgrades and negative outlook revisions by Moody’s worldwide.

As of end June, Moody’s has downgraded the credit ratings of 18 sovereigns and revised to “negative” the outlook on the ratings of 27 sovereigns.

“The rating affirmation and stable outlook reflect Moody’s view that the fortification of the government’s fiscal position in recent years provides a buffer against a rise in public indebtedness due to shocks such as the ongoing global coronavirus outbreak. Relatedly, the track record of prudent economic and fiscal management, and a robust banking system, contribute to the stable access to funding at moderate costs and support prospects for fiscal consolidation and debt stabilization after the shock subsides,” the debt watcher said.

Two of the country’s top economic officials welcomed the latest rating decision of Moody’s.

Finance Secretary Carlos Dominguez III said: “The COVID-19 pandemic is a black swan that has shoved countries, including the Philippines, into what is shaping up to be the world's worst economic downturn since the Great Depression. But what separates our country from most virus-hit economies is that we were caught up in this global health crisis with ample buffers to cushion its fallout while keeping our debt level manageable and without compromising our fiscal health.

"Given the prudent management of the economy under the leadership of President Duterte, along with the bold initiatives such as tax reform that he has carried out since he assumed office in 2016, the Philippines has wielded enough fiscal space ahead of the deepening coronavirus crisis," Dominguez said.

"Such fiscal space has let the Duterte administration to spend big on its Four-Pillar Strategy to beat the COVID-19 pandemic, which is anchored on providing relief to the poor and other badly hit sectors, beefing up our healthcare capacity, and stimulating the domestic economy to an early and strong recovery," he added.

The strategy has a combined value of P1.7 trillion, equivalent to 9.1 percent of GDP as of May.

“We thank Moody’s for recognizing our country's strengths in the face of this unprecedented global crisis," he said. “We also thank the two chambers of the Congress for their close working relationship with the Executive Department as manifested by their continuous support for presidential policies and timely action on our priority legislative measures that have become our shield in protecting the country's sterling credit standing before the international and domestic investor community.”

"On the back of such strong fundamentals, the Duterte administration is committed to a calibrated reopening of  the domestic economy in order to quickly restore business and consumer confidence while  holding on to certain mobility restrictions and strict health protocols meant to further slow COVID-19 spread, save lives and protect communities," he added.

Bangko Sentral ng Pilipinas (BSP) Governor Benjamin Diokno said: “The Philippines entered this crisis in a position of strength characterized in part by healthy external accounts, sound and stable banking system, and manageable inflation.

“Complementing these buffers are the prompt, decisive, and extraordinary measures implemented by the BSP and the National Government to save lives and livelihoods, and to make sure we emerge from this crisis stronger than before. The BSP has already done a long list of relief measures, and we stand ready to do more if needed, especially as our policy space and tool kit are far from being exhausted.

“The affirmation of our credit rating by Moody’s—together with the recent favorable actions on the Philippines by other credit rating agencies—show that important stakeholders from the international community recognize that the Philippines is on the right track as far as managing the effects of the COVID-19 crisis is concerned.”

In May, Fitch Ratings and S&P Global affirmed the country’s BBB and BBB+ ratings, respectively, with both ratings being assigned a “stable” outlook.

In June, Japan Credit Rating Agency (JCR) upgraded the country’s credit rating by a notch from BBB+ to A-.

Earlier in February, another Japanese CRA, Rating and Investment Information Inc., upgraded the Philippines’ rating to BBB+.

All debt watchers cited the country’s strong fundamentals going into the crisis, the projected solid economic recovery, and gradual return to fiscal consolidation over the near term.

Favorable credit rating developments have allowed the Philippines to access funding at relatively low interest rates at this difficult time. These free up resources to fund other important programs and projects, such as the provision of assistance to those whose incomes had been affected by the community quarantine as well as for the economic recovery initiatives.

For its part, the BSP has done a wide range of policy measures, including a cumulative 175-basis-point cut in the policy rate and a 200-bps reduction in the reserve requirement ratio, a P300-billion repurchase agreement with the National Government, and a long list of regulatory relief measures. The regulatory relief measures are meant to help ensure banks stay healthy amid the crisis, and that they are able to appropriately serve clients as well, more so micro, small, and medium enterprises (MSMEs) and large businesses that have been hit hard by the crisis.

Both the BSP and the DOF are proposing vital legislative measures that will help accelerate and sustain the country’s economy recovery.  The BSP and DOF are both pushing for the Financial Institutions Strategic Transfer (FIST) Act, which will allow a bank to transfer distressed assets, including bad loans, to a separate corporate entity; as well as a law that will allow infusion of additional capital to government financial institutions for them to be able to act as wholesale banks and fund substantial portions of loans that other commercial banks will provide to micro, small, and medium enterprises affected by the pandemic.

The BSP is also proposing the amendment of the New Central Bank Act (R.A. No.  7653) for purposes of strengthening the BSP’s supervision over financial conglomerates, particularly by allowing it to look more closely into how affiliates affect operations of banks; as well as a proposed law on strengthening recovery and resolutions planning for banks to align the country’s legal framework with international standards.

The DOF is also pushing for the Corporate Recovery and Tax Incentives for Enterprises Act (CREATE), which will reduce corporate income taxes for the majority of MSMEs by 5 percentage points immediately and will further cut the tax by one percentage point every year from 2023 to 2027.

In its report, Moody’s cited the trend of improving fiscal metrics that the Philippines registered consistently prior to the COVID-19 pandemic. For instance, the national government’s debt as a percent of GDP has fallen from 50.2 percent in 2010 to 39.6 percent in 2019.

It also acknowledged the country’s strong external accounts and healthy banking sector.

“Reserve coverage of external debt and external debt servicing will remain ample and continue to be much stronger than similarly rated emerging market peers, while providing insulation from sudden shifts in global liquidity conditions and capital flow volatility. Combined with a robust banking system, this results in low government liquidity risks, reflected in stable access to funding at moderate cost,” the debt watcher said.

Moody’s projects the Philippine economy to contract by 4.5 percent this year, taking into account the disruptions to economic activities caused by the health crisis. But it expects the Philippines to bounce back with a robust growth of 6.5 percent in 2021, to be followed by a solid growth of around 6 percent in the succeeding years.

Moody’s said the recovery projection comes on the back of favorable demographics and improving investment climate.

The debt watcher’s recovery projection is consistent with early indicators of recovery as the Philippine economy reopens. In the manufacturing sector, the Philippines Statistics Authority stated in its Monthly Integrated Survey of Selected Industries that the capacity utilization of factories as a whole increased to 73.4 percent in May compared to 71.2 percent in April.

The Bureau of Customs, on the other hand, exceeded its June collection target by 4.4 percent due to higher import volume, which is another indicator of rising economic activity.

In addition, the Board of Investments (BOI) reported that it has approved P645.3 billion worth of investments in the first six months of the year, up 112 percent from P304.4 billion in the same period last year.

On top of investments from the private sector, the government has also started to accelerate the construction of various massive infrastructure projects under the “Build, Build, Build” program following the lifting of the enhanced community quarantine in Luzon. This will help boost employment and economic activities moving forward.