Philippine credit rating downgrade possible by early 2022 – ING

MANILA, Philippines — The Philippines faces the likelihood of a credit rating downgrade from debt watchers if the country fails to immediately address the scarring effects caused by the COVID-19 pandemic, according to Dutch financial giant ING Bank.

Nicholas Mapa, senior economist at ING Bank Manila, said at least two credit rating agencies recently flagged the presence of scarring effects on the Philippine economy as the protracted recession has not only hindered its ability to grow but also sapped the potential output that would have helped the country grow in the future.

“Successive quarters of subdued economic growth will likely suggest weaker revenue collections and a loss of ability to service debt, with scarring effects also likely to result in possible rating downgrades from credit rating agencies as early as the first quarter of 2022,” Mapa said.

Economic scarring refers to the medium to long term damage done to the economies of one or more countries following a severe economic shock that leads to a recession.

The Philippines slipped into recession with a record 9.6 percent GDP contraction last year.

“Prior to the pandemic, the Philippines displayed the ability to grow in the present and in the future. However, with the scarring effects now becoming evident, it looks like the Philippines will struggle to (achieve) growth now and in the quarters to come,” Mapa said.

Mapa said the protracted recession has resulted in the stark loss of potential output for the Philippines as evidenced by forgone investments in productive capacity as bank lending craters for a sixth month and capital formation is in the red for five long quarters.

“Credit rating agencies have flagged the presence of scarring effects. Forgone investments in capital goods and infrastructure coupled with the impact on our human capital almost ensure that our growth trajectory will no longer resemble our pre-pandemic GDP path.  Furthermore, potential output is not easily restored and will take years of continuous capital buildup to replenish lost potential,” Mapa said.

If scars align, ING sees a “dirty-L”-shaped recovery for the Philippines after beginning the pandemic from a position of strength and ending it by entering a lower growth path for months to come.

BSP Governor Benjamin Diokno said the Financial Stability Coordination Council (FSCC) would meet in two weeks to look into the long-term and deeper effects of the pandemic.

“If you look at the rating of the credit rating agencies, only one out of four has actually downgraded the outlook and not our credit rating. So let’s not be too pessimistic,” said Diokno, who also chairs the FSCC.

Last June 25, New York-based Fitch Ratings lowered the country’s outlook to negative from stable but retained the credit rating at BBB or a notch above minimum investment grade.

At the height of the global health crisis in June last year, the Philippines obtained its A-scale rating after the Japan Credit Rating Agency (JCRA) upgraded the country to A- from BBB+.

On the other hand, S&P Global Ratings affirmed the country’s BBB+ rating or a notch below the A-scale, while Moody’s Investors Service retained the Baa2 rating or a notch above minimum investment grade on the back of stable outlook.

The latest FSR highlights the signs of recovery, but is also a reminder that market conditions remain fluid. It reiterated the importance of vigilance and pre-emptive thinking against the backdrop of an uneven pace of recovery across jurisdictions.

“We are definitely better off today than a year ago. However, the ongoing recovery from old risks can generate a new set of potential risks. We need to continuously track these potential systemic risks, and act when warranted,” Diokno added.

He said “many aspects of the future remain uncertain and with uncertainty, risk aversion in financial markets may not be too far behind.”