Downgrade

The bad news just keeps coming.

This week, Fitch Ratings downgraded the Philippines’ outlook to “negative” from “stable.” The outlook downgrade could pave the way to a credit ratings downgrade a few months down the road.

The downgrade of our economic outlook is the result both of external factors beyond our control as well as by our own failings in taming corruption. We are both victim and culprit.

The external factors are fairly evident. Since Trump and Netanyahu initiated their unprovoked war on Iran, the global economy was thrown into chaos. Oil prices spiked and supply has become uncertain. Maritime traffic through the vital Strait of Hormuz remains constricted and the combatants seem equally captive to the escalation trap.

A whole range of petrochemical products from potassium needed as fertilizer, sulfuric acid and helium that have numerous industrial uses and LNG have become unavailable. Attacks on production facilities will keep LNG unavailable for a longer period.

As a consequence, global agriculture is expected to produce less. Food will become more expensive. Travel will be curtailed both by higher fares as well as by shortages of aviation fuel.

The Philippines is especially vulnerable. Being an archipelago, we rely extensively on inter-island transport. Having failed to significantly improve on the efficiency of our agriculture, we are now heavily dependent on imported food.

Much of our consumption-driven growth is fueled by remittances from our large migrant labor force. We expect many of our workers, especially in the Gulf economies, to be displaced.

We have a worsening balance of payments deficit. Should the worsening continue, this will put pressure on the peso’s exchange rate. If the peso continues to depreciate, this will magnify the costs of our imports.

For both structural and poor governance reasons, our public debt is piling up much faster than our domestic economy expands. The massive subsidy programs launched to cushion the effects of the current crisis increases our propensity to borrow. The trends are unhealthy.

It is not just the present crisis that forced the outlook downgrade. The massive public works scandal that broke into the open last year disrupted public investments.

The Marcos administration’s first response to the scandal was to suspend public works projects. This suspension ignored the fact that that our economic growth is fueled, in the main, by public spending. The abrupt cancellation of public works projects is the principal reason our 2025 growth dropped to only 4.4 percent against the previous target of between 5.5 to 6.5 percent.

Given the tighter fiscal environment we are operating in, there is little likelihood government could invest more on modernizing our infra. Logistics costs as a component of the final price of products will remain unbearably high. We can compete even less for our share of investments.

Should the negative outlook given our economy eventually lead to a credit ratings downgrade, this will be debilitating. For over two decades, we worked so hard to improve our credit ratings – only to lose it in one blow.

If we suffer a credit rating downgrade, borrowing will become more expensive. Outstanding debt obligations with floating rates will be repriced. The debt service, automatically allocated, will eat up the national budget. The fiscal space for investing in a better economy shrinks.

Until the public works scandal broke into the open last year, we appeared ready to climb up to the status of a “high middle-income country.” The downgrading of our economic outlook makes this an even more distant goal.

Given all the things going on, the best we could do is to try and keep our GDP growth rate above four percent – or at least to keep it above the population growth rate. This will at least keep us running in place.

We can no longer aspire to be the growth leader in the ASEAN area. Vietnam is outstripping everyone else. Most of the other ASEAN countries are coping with the present global crisis better than we are.

Remarkably, for all the doom predicted for her economy, China posted a 2025 growth rate of five percent. The superpower planned ahead and dramatically improved on its energy profile, making it less vulnerable to the present oil squeeze. Nevertheless, China has accumulated the world’s largest oil reserve. This is a country that will go to war if needed to protect her energy lifeline.

Over the next few months, or years, the world will be experiencing a combination of lower growth and higher inflation rates. These are not the best conditions to grow our economy.  But it will not be right to blame our poor prospects entirely on the war in the Middle East.

We had many opportunities to break out of the middling development cycle we seem trapped in. We wasted all of them.

We did not want for the generosity of our friends. Official development assistance was generously extended to us. The least we could do is to avoid dishonoring our friends by putting our counterpart funding for foreign-assisted projects under the heading of “unprogrammed” allocations.

We failed to break the grip of corruption that put our public funds to waste. When the flood control scandal broke out, we cancelled the projects in haste while taking our time sending the culprits to jail.

The fault, to quote from Shakespeare, is not in our stars but in ourselves.