Credit assessors await fiscal consolidation plan from incoming administration

A view of residential condominium buildings in the city of Mandaluyong in Metro Manila, the Philippines, August 22, 2016. — REUTERS

By Luz Wendy T. Noble, Journalist
and Tobias Jared Tomas

CREDIT RATING AGENCIES keep a close eye on how the incoming Marcos administration will handle the country’s growing debt when assessing the Philippines’ sovereign rating.

Moody’s Investors Service is also concerned about the debt of affordability as it reflects of a sovereign Ifscale flexibility, said Christian de Guzman, senior vice president of Moody’s sovereign risk group.

Debt affordability is the ratio of the annual interest payments required to maintain a government’s debt to its annual tax revenue.

“Indeed, although there was a sharp rise in public debt that essentially reversed the debt reduction progress that was made in the decade before the pandemic, we have not seen a such a significant deterioration in debt affordability for the Philippines,” De Guzman said in an email.

The stock of national government debt hit a record high of 12.68 trillion pesos at the end of March, according to the Bureau of the Treasury (BTr).

“For comparison, the last time the Philippine government saw debt levels similar to today’s, i.e. in the early to mid-2000s, the interest payments ratio /revenue was much worse than what we see today,” De Guzman said.

Relatively stable interest rates and continued tax reforms have helped improve debtffaffordable for the Philippines, he said.

Moody’s last affirmed its “Baa2” credit rating with a “stable” outlook for the Philippines in July 2020.

“As factors that would lead to a downgrade in the Philippines’ sovereign rating, we have previously cited a further deterioration in fiscal and government debt measures relative to their peers or an erosion of the country’s external payments position that threatens liquidity conditions,” De Guzman said. mentioned.

Any reversal of economic reforms, “a substantial deterioration of institutions and the strength of governance, with signs of erosion in the quality of legislative and executive institutions”, would also be negative, he added.

The national government’s debt-to-gross domestic product (GDP) ratio reached 63.5% at the end of March, the highest in 12 years. It also exceeded the 60% threshold deemed manageable by multilateral lenders for emerging economies.

“Ultimately, the rating trajectory will be informed by the incoming administration’s ability to stabilize and possibly reverse deteriorating debt levels over the medium term,” De Guzman said.

Meanwhile, S&P Global Ratings director YeeFarn Phua said he would closely monitor any sustained deterioration in the Philippine national government’s fiscal and debt position that exceeds his projections, as this poses downside risk. on the ratings.

“Although the current net debt to GDP ratio is still well below 60%, we note that the faster rate of debt increase is eroding Ifscal drunkffers,” Mr. Phua said.

In the case of the Philippines, net debt takes into account the country’s liquid assets like social security assets and deposits with central banks, he said. It also excludes government securities held by the National Bond Sinking Fund.

For now, Phua said S&P’s “stable” outlook on the country’s “BBB+” rating assumes fiscal performance will improve as the economy recovers from the pandemic.

It will be crucial for the new Marcos administration to implement measures that will reduce the budget deficit and pursue economic reforms to avoid a possible downgrade in the country’s investment rating, analysts said.

Pantheon Macroeconomics’ chief economist for emerging Asia, Miguel Chanco, said rising debt to GDP would not be the only determinant of the possibility of a ratings downgrade.

“What will matter more, however, is how quickly the new government can consolidate its fiscal deficit over the next two years, as the Philippines has suffered one of the biggest fiscal blowouts in emerging Asia. progress is made, more of the big three rating agencies could change their outlook from ‘negative’ to ‘stable’,” Chanco said in an email.

In 2021, the budget deficit increased by 21.87% to reach 1,700 billion pesos, or 8.61% of GDP. For this year, the government has established a budget ofIfceiling quoted at 7.7% of economic output.

Tackling the growing national debt going forward should be a priority for the new administration of Ferdinand R. Marcos, Jr., UnionBank of the Philippines, Inc., Chief Economist Ruben Carlo O. Asuncion said.

“Credit assessors have a long-term horizon before lowering one of their ratings, except when they think the situation in a particular economy has deteriorated rapidly,” Mr. Asuncion said.

Since his landslide victory in the May 9 presidential election, Marcos has yet to announce his economic team or provide details of his economic plan.

Meanwhile, ING Bank NV Manila chief economist Nicholas Antonio T. Mapa said Fitch Ratings had noted concerns about the Philippines’ ability to reduce debt over time.

“While we believe the ratings agencies will give the new administration some leeway before possible action on credit ratings, we believe that the longer our leverage ratios remain above key thresholds, the more the Philippines will be susceptible to possible downgrades,” Mapa said in an e-poster.

In February, the debt watchdog maintained the “negative” outlook on the country’s “BBB+” rating, which opens the possibility of a downgrade in the next 12 to 18 months.

The country’s investment rating allows the government to access lower borrowing rates. It could also boost investor sentiment as it reflects the ability of a government to repay its debt.

Finance Secretary Carlos G. Dominguez III said in April that the Philippine economy needed to grow more than 6% a year for the next five to six years to reduce the country’s debt that has ballooned during the pandemic.

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