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Rating Action:

Moody's affirms the Philippines' Baa2 ratings; maintains stable outlook

16 Jul 2020

Singapore, July 16, 2020 -- Moody's Investors Service ("Moody's") has today affirmed the Government of the Philippines' long-term local and foreign currency issuer and senior unsecured debt ratings at Baa2. The outlook has been maintained at stable.

The rating affirmation and stable outlook reflect Moody's view that the fortification of the government's fiscal position in recent years provides a buffer against a rise in public indebtedness due to shocks such as the ongoing global coronavirus outbreak. Relatedly, the track record of prudent economic and fiscal management, and a robust banking system, contribute to stable access to funding at moderate costs and support prospects for fiscal consolidation and debt stabilization after the shock subsides.

At the same time, beyond proposed legislation aimed at facilitating the near-term recovery from the pandemic shock, Moody's expects that more structural economic and fiscal reforms will be on hold for some time, delaying potential further improvements in the Philippines' credit profile. And in contrast to strong policy effectiveness, governance weaknesses especially with regards to perceived constraints on civil society and the judiciary, continue to weigh on the rating.

Moody's has also affirmed the government's foreign currency senior unsecured shelf rating at (P)Baa2 and the senior unsecured ratings for the liabilities of the country's central bank, Bangko Sentral ng Pilipinas (BSP), at Baa2. In Moody's view, the credit quality of the central bank is closely aligned with that of the government.

The Philippines' country ceilings remain unchanged. The long-term foreign currency bond ceiling remains at A3, and the short-term foreign currency bond ceiling at P-2. The long-term foreign currency deposit ceiling remains at Baa2, and the short-term foreign currency deposit ceiling at P-2. Furthermore, the long-term local currency bond and deposit ceilings remain unchanged at A2.

RATINGS RATIONALE

RATIONALE FOR THE RATING AFFIRMATION AT Baa2

TRACK RECORD OF PRUDENT FISCAL MANAGEMENT SUPPORTS PROSPECTS FOR DEBT STABILIZATION

The Philippines sustained a decade-long trend of improving fiscal metrics, with national government debt falling to 39.6% of GDP in 2019 from 50.2% in 2010. Over the same period, a strengthening track record of macroeconomic stability, proactive debt management by the Bureau of the Treasury, and revenue gains from tax reform led to a halving in national government interest payments as a share of revenue to 11.5% from 24.4%.

This strengthening in credit metrics, anticipated and reflected in successive upgrades in the Philippines' rating between 2009 and 2014, support Moody's view that the sovereign will be resilient to shocks such as the coronavirus pandemic.

Moody's expects a sharp economic contraction (GDP to fall by 4.5% in 2020) which will undermine the Philippines' fiscal strength somewhat by contributing to a sharp drop in revenue, raising the government's debt burden and weakening debt affordability. However, fiscal strength will remain consistent with similarly-rated peers.

On a general government basis, which consolidates the national government, local government units and social security institutions, Moody's expects government debt to rise to over 45% of GDP and interest payments as a share of revenue to worsen to around 12% in 2020, from an estimated 37.3% and 8.9% in 2019 respectively, both of which will be similar to the median levels for Baa2-rated sovereigns.

Beyond 2020, Moody's expects government debt to stabilize through gradual fiscal consolidation. Initial revisions to the government's medium-term fiscal outlook have signaled significant downward adjustments in expenditure in Philippine peso terms, while revenue is likely to be supported by the economic recovery and incremental gains from previous tax reforms. Moody's forecasts the general government debt burden to peak next year, just under 46% of GDP, before falling gradually over the next several years.

ECONOMIC AND EXTERNAL STRENGTHS REMAIN INTACT

Following the sharp economic contraction in 2020, the worst outturn in 35 years, Moody's projects that real GDP growth will recover to 6.5% in 2021 and converge towards potential rates of around 6% per annum thereafter. Unless the Philippines faces a significant and prolonged drop in remittances and an acceleration in the fragmentation of regional supply chains, growth potential will continue to be boosted by favorable demographics and ongoing improvements in the investment climate.

External vulnerability risks are muted despite pressures on the Philippines' exports of goods and services and an expected fall in remittances from overseas Filipinos. These have been offset thus far by a contraction in goods and services imports, reflecting a combination of lower domestic demand, supply chain disruptions, and lower prices for commodities such as oil and oil products. As a result, Moody's expects the current account balance to remain in a mild deficit position.

Aided by the government's demonstrated access to international funding markets and still stable direct investment inflows, foreign currency reserves have climbed to a record high as of May 2020. In turn, reserve coverage of external debt and external debt servicing will remain ample and continue to be much stronger than similarly-rated emerging market peers, while providing insulation from sudden shifts in global liquidity conditions and capital flow volatility. Combined with a robust banking system, this results in low government liquidity risks, reflected in stable access to funding at moderate costs.

BUT REFORM MOMENTUM LIKELY TO PAUSE

The adverse economic backdrop and political considerations weigh on the outlook for further structural reforms. So long as the coronavirus outbreak remains unresolved, lawmakers will likely retain their focus on facilitating the near-term recovery from the pandemic shock. In addition, as Moody's expects campaigning to detract attention away from lawmaking ahead of the next general election scheduled for 2022, the government will have, at most, a comparatively short window to pursue its legislative agenda.

In this context, the combination of a shock like the coronavirus outbreak and forthcoming election cycle likely exerts an opportunity cost with regards to the implementation of proposed economic and fiscal reforms that would build on recent gains in improving the investment climate, promoting investment and assisting in fiscal consolidation. Such measures include proposed changes to the Foreign Investments Act, the Public Service Act and the Retail Trade Liberalization Act, as well as the remaining thrusts of the government's Comprehensive Tax Reform Program.

RATIONALE FOR STABLE OUTLOOK

The stable outlook reflects the view that the recovery from the acute shock posed by the coronavirus outbreak will restore rapid economic growth relative to peers, complemented by the stabilization and eventual reversal of the deterioration in fiscal and debt metrics.

This scenario is balanced against the risk that the economy's potential is hit more significantly than Moody's currently estimates and/or that fiscal and economic reform momentum does not resume, leaving the Philippines economic and fiscal strength somewhat weaker. In particular, the near- to medium-term economic outlook remains uncertain given the persistence of coronavirus infections both domestically and globally, especially among the Philippines' largest trading partners and key destinations and sectors for overseas labor. Continued domestic transmission poses risks of a wider return to stricter lockdown conditions, impeding the recovery projected to commence during the second half of 2020. Lower remittances from overseas Filipinos could also weigh on incomes and consumption to a greater extent than Moody's currently estimates.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

Environmental considerations are material to the Philippines' credit profile, given the high incidence of climate-related disasters, as well as the relatively large, albeit declining, share of the labor force employed by the agricultural sector (22.9% of total employment in 2019, down from 33.2% in 2010). Drought conditions associated with El Niño have led to supply-side disruptions to agricultural output in recent years, contributing to inflation volatility and dampening household purchasing power. Overall, the severity and frequency of extreme weather events can increase the Philippines' GDP growth volatility, as well as public expenditure due to costs associated with reconstruction or rehabilitation.

Social considerations are material to the Philippines' credit profile given pervasive levels of poverty and consequently low overall levels of wealth, notwithstanding recent progress on poverty reduction. The World Bank estimates that the poverty rate has declined to around 20% from around 35% in 2009. In the context of rapid economic growth, however, income inequality remains high while development gaps persist between large, urban centers and rural areas. In line with its socioeconomic reform agenda, the government has sought to facilitate inclusive growth and accelerate poverty reduction through infrastructure development, increased access to healthcare and education, and greater investment outside of the National Capital Region. Moody's regards the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety, as well as the potential to unwind the relatively rapid progress on poverty reduction. For the Philippines, the shock materializes in a sharp fall in economic activity related to the pandemic-containment measures and lower remittances.

Governance considerations are material to the Philippines' credit profile and are incorporated in Moody's assessment of institutions and governance strength. The erosion in the Worldwide Governance Indicators for rule of law and control of corruption in recent years partly reflects perceptions of the government's controversial approach to the illegal drugs trade and alleged suppression of political dissent. However, this has not impaired the effectiveness of the government's overall economic and fiscal management.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

WHAT COULD CHANGE THE RATING UP

Factors that would prompt an upgrade of the Philippines' sovereign rating include evidence of a more rapid reversal of the deterioration in fiscal and debt metrics stemming from the coronavirus shock. This would likely entail a sustained restoration of economic growth to rates similar to those recorded prior to the outbreak. Together, a resumption of sustained high growth and rapid restoration of fiscal strength would denote particularly effective macroeconomic and fiscal policy.

WHAT COULD CHANGE THE RATING DOWN

Factors that would prompt a downgrade of the Philippines' sovereign rating include the emergence of macroeconomic instability that would lead to a greater deterioration in fiscal and government debt metrics and/or an erosion of the country's external payments position. The reversal of reforms that have supported prior gains in economic and fiscal strength would also likely lead to a downgrade. A material deterioration of institutions and governance strength, with signs of erosion in the quality of legislative and executive institutions, would also be negative.

GDP per capita (PPP basis, US$): 9,471 (2019 Estimate) (also known as Per Capita Income)

Real GDP growth (% change): 6% (2019 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 2.5% (2019 Actual)

Gen. Gov. Financial Balance/GDP: -1.5% (2019 Estimate) (also known as Fiscal Balance)

Current Account Balance/GDP: -0.1% (2019 Actual) (also known as External Balance)

External debt/GDP: 22.2% (2019 Actual)

Economic resiliency: a3

Default history: No default events (on bonds or loans) have been recorded since 1983.

On 13 July 2020, a rating committee was called to discuss the rating of the Philippines, Government of. The main points raised during the discussion were: The issuer's economic fundamentals, including its economic strength, have not materially changed. The issuer's institutions and governance strength has materially increased. The issuer's fiscal or financial strength, including its debt profile, has not materially changed. The issuer's susceptibility to event risks has not materially changed.

The principal methodology used in these ratings was Sovereign Ratings Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1158631. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Christian de Guzman
Senior Vice President
Sovereign Risk Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Marie Diron
MD-Sovereign/Sub Sovereign
Sovereign Risk Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

No Related Data.
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