An outright downgrade of the Philippine sovereign credit rating is unlikely unless the war in the Middle East drags on, Nomura Global Markets Research said, adding that growth should rebound as the government accelerates spending.
In a note, Nomura economists Euben Paracuelles and Nabila Amani said the country’s fiscal risks are more manageable than those facing many of its peers that are also under ratings pressure.
On Monday, Fitch Ratings revised its outlook on the Philippines to ‘negative’ from ‘stable,’ signaling that the country’s investment-grade ‘BBB’ rating could be downgraded within one to two years if fiscal conditions fail to improve.
The move followed last week’s setback, when S and P Global Ratings cut its outlook to ‘stable’ from ‘positive,’ dimming hopes that the country could soon secure its first-ever ‘A’ rating from one of the three major credit rating agencies.
Fitch’s rating stands one notch below S and P’s ‘BBB+,’ itself one step short of the coveted ‘A’ level.
Explaining their actions, both agencies pointed to the same challenge: The Philippine government, still reeling from the fallout of a major corruption scandal that paralyzed public spending, is confronting an oil shock with diminished fiscal buffers.
‘As we argued before, a shift to a negative outlook, much less a rating downgrade, by S and P, is unlikely over the next few months, even with its higher credit rating, and we believe it will be the same for Fitch, unless the crisis becomes is significantly prolonged,’ Paracuelles and Amani said.
Review cycle
‘By the next review cycle (which is usually 12 months, unless there are significant developments that warrant an earlier review), the main factors cited by Fitch for a downgrade will likely show some improvements, in our view,’ they added.
Moody’s Ratings, the third major agency, has yet to announce a rating action. But in an April 14 credit opinion, it warned that the conflict in the Gulf region has increased downside risks to the Philippines’ economic outlook by lifting global energy prices and intensifying external cost pressures.
A rating downgrade could mark the country’s first since 2005, when political turmoil and fiscal instability eroded the Philippines’ credit standing.
A lower rating could raise the government’s borrowing costs at a time when it is running a budget deficit to finance development spending.
Infrastructure spending
But looking ahead, Nomura said gross domestic product growth should rebound as the government implements catch-up infrastructure spending and as terms-of-trade pressures ease. This assumes that a US-Iran deal could be made.
The bank forecasts 2026 growth at 5 percent-above Fitch’s 4.6 percent-even after trimming its own projection from 5.3 percent to reflect the energy price shock.
‘We still think the government has a limited appetite to implement blanket fuel subsidies that tend to be difficult to unwind,’ Nomura said. ‘Therefore, the medium-term fiscal consolidation agenda is unlikely to be derailed, even if implemented more gradually to recalibrate for the external shock and evolving domestic economic conditions, in our view.