Credit rating agency Fitch Ratings has affirmed its investment grade rating for the Philippines on strong growth and buffers but kept its negative outlook due to lingering uncertainty in the government’s pandemic response.

Fitch said it is maintaining the Philippines’ Long-Term Foreign-Currency Issuer Default Rating or IDR at “BBB” with a negative outlook because while there are signs of growth and sufficient external buffers, they still detect “lagging structural indicators” such as per capita income, governance and revenue mobilization.

The negative outlook, meantime, is mostly due to Fitch’s perceived uncertainty about the county’s medium-term growth prospects and "possible challenges in unwinding the policy response to the health crisis and bringing government debt on a firm downward path.”

Despite commenting on the Philippines’ uncertain economic recovery, Fitch still forecasts GDP growth of 6.9 percent in 2022 and seven percent in 2023. These projections depend on the fiscal and monetary policy response, infrastructure spending spending, remittances and exports. The downside risks continue to be the pandemic, new variants, and upcoming May national elections.

Fitch also reiterated its concerns on the country’s debt trajectory which it said will depend on the “balance of fiscal consolidation and ongoing government spending to support the economic recovery.”

“We project general government debt/GDP to reach 54.5 percent in 2022, then decline to 53.1 percent in 2023, from an estimated 54 percent in 2021 (2020: 48.1 percent),” noted Fitch. “This is still below our 'BBB' median forecast of 55.3 percent in 2022 and 56.6 percent in 2023. However, we expect the debt/revenue ratio of 278.7 percent in 2022 to exceed the 'BBB' median of 257 percent,” it added.

Fitch said they also forecast the budget deficit to decline gradually from 7.7 percent of GDP this year to six percent in 2023. It stressed on “deficit central bank financing risks” but noted that the Bangko Sentral ng Pilipinas (BSP), which has provided the government with direct financing of P500 billion three times, has already scaled back on its loan advances.

“We regard this direct monetary financing as temporary amid the exceptional circumstances of the pandemic, but it could pose risks to policy credibility and macroeconomic stability if continues beyond the immediate needs of the health crisis,” said Fitch.

BSP Governor Benjamin E. Diokno, in a Viber message on Friday, Feb.18, said the investment grade rating is intact “amid a wave of rating downgrades for many other countries.”

“Price and financial stability will help sustain Philippine economic recovery and growth. Besides improvement in the COVID-19 situation with rising vaccination rates, we also see that rising credit activities and a favorable outlook will support growth moving forward,” said Diokno.

He also assured that the domestic banking system remains “sound and well capitalized” and that “banks continue to serve the growing demand for credit” in a backdrop of a manageable inflation.

“We expect inflation to stay well with the target range of 2-4 percent up to 2024, which will provide an enabling environment for consumption and investments,” said Diokno.

In a statement released by the BSP, it noted the risk factors cited by Fitch such as the fiscal cost of managing COVID-19 cases and spread, as well as the challenges from the unwinding of stimulus measures.

“However, the debt watcher was also of the view that the country’s fundamental policy strategies will continue, given the decades-long track record of sound economic performance,” said the BSP.

In the same statement, Finance Secretary Carlos G. Dominguez III said the government “has accommodated the huge cost of COVID-19 crisis response to help vulnerable sectors survive and recover from the crisis” and he cited the comprehensive tax reform program as part of the solution.

“We are also mindful not to pass on to future generations unsustainable debt,” he commented in reply to Fitch’s debt concerns. “Estimated to have reached around 54 percent of GDP in 2021, the general government’s debt remains manageable, and we expect this to remain at around the same level this year and the next,” said Dominguez.

Fitch said that the general government debt-to-GDP ratio of the Philippines is still below that of its peer median.