Philippines’ fiscal buffers eroded by COVID-19 economic ‘shock’ —Fitch Ratings

Global debt watcher Fitch Ratings on Tuesday said the Philippines has lost some of its fiscal buffers due to the economic fallout resulting from the COVID-19 pandemic.

“The Philippines entered the crisis with fiscal buffers, given its low general government debt ratio of 34.1% of GDP (gross domestic product) in 2019, against the ‘BBB’ peer median of 42.2%,” Fitch Ratings said in a statement.

“These buffers are being eroded by the pandemic-related economic shock, but there is still room to accommodate some deterioration in the fiscal outlook,” it said.

In May, the debt watcher affirmed the Philippines’ credit rating of “BBB,” reflecting the country's fiscal and external buffers, including a lower government debt-to-GDP ratio compared with its peers.

However, it revised the country’s outlook back to “stable” from “positive,” reflecting deterioration in the Philippines' near-term macroeconomic and fiscal outlook as a result of the impact of the global COVID-19 pandemic and domestic lockdown to contain the spread of the virus.

“Downside risks to our economic projections for the Philippines, noted in our last rating review in May 2020 – when we affirmed the country’s ratings at ‘BBB’ and revised the Outlook to Stable, from Positive – are materialising due to the country’s difficulty in containing the virus,” Fitch Ratings said.

In the second quarter of 2020, the Philippine economy as measured by GDP - the value of goods and services produced by a nation in a given period - shrank 16.5% —the worst performance on record since 1981.

The negative GDP in the April to June period has brought the country to a “technical recession,” the first time since 1991.

With the country’s entry to recession, Fitch Ratings said its forecast that the economy will contract by 4% in 2020 “now appears optimistic and is likely to be revised down.”

The Duterte administration’s economic managers have revised their GDP estimated for the entire 2020 to -5.5% from its earlier projection of -2.0% to -3.4%.

Nevertheless, Fitch Ratings said that despite a weakening in the country’s public finances amid the pandemic shock, “some fiscal headroom remains at the current rating level owing to its low public-debt position going into the crisis.”

The debt watcher said that the general government debt ratio will rise to around 48% of GDP in 2020, “which would still be below the projected peer median of 51.7%, although it is a substantial rise from its level in 2019.”

Fitch Ratings also cited the return to stricter lockdown of Metro Manila and its nearby provinces.

“The continued spread of COVID-19 in the Philippines has necessitated renewed lockdown measures in and around the capital of Manila, which are likely to depress economic growth by much more than Fitch Ratings had anticipated,” it said.

President Rodrigo Duterte placed Metro Manila, Laguna, Cavite, Rizal, and Bulacan under MECQ from August 4 to 18 following pleas from the medical community for a “time out” amid rising COVID-19 cases being admitted to hospitals.

“[I]f the economy continues to contract and fails to recover as fast as the authorities expect; indeed, if the recovery stalls, there may be pressure for even more fiscal stimulus,” Fitch Ratings said.

The debt watcher said it will continue to assess the authorities’ ability to adhere to the fiscal consolidation plans in their medium-term framework.

“Our baseline assumption that public debt will remain below the peer median level remains subject to risks, particularly those associated with the pandemic,” it said.

“We will also assess the extent to which the crisis may affect the Philippines’ strong medium-term growth potential, which has supported the country’s rating,” it added.—AOL, GMA News