Singapore, September 15, 2022 -- Moody's Investors Service ("Moody's") has today affirmed the Government of the Philippines' long-term local and foreign currency issuer and senior unsecured ratings at Baa2. The outlook remains stable.
The rating action is driven by Moody's view that the challenging global credit conditions will not derail the Philippines' ongoing recovery from the coronavirus pandemic, although the severity of the pandemic shock has led to an erosion in the rating agency's assessment of economic strength. Moreover, continued policy orthodoxy and commitment to reform amid political transition will help to assure gradual fiscal repair following the reversal of the strengthening of the government's fiscal and debt metrics resulting from the pandemic. The Philippines also retains fundamental strengths with regards to the stability of its banking system and the capacity to meet external debt repayments, notwithstanding cyclical pressures on the balance of payments and consequent exchange rate depreciation.
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' local and foreign currency country ceilings are unchanged at A1 and A2, respectively. The local currency ceiling, four notches above the rating reflects a small government footprint in the economy, moderate political risks and limited external imbalances. The foreign currency ceiling, one notch below the local currency ceiling, primarily reflects potential constraints to capital account openness, despite limited evidence of transfer and convertibility risks given ample reserves and low external debt relative to peers.
RATINGS RATIONALE
RATIONALE FOR THE RATING AFFIRMATION
RECOVERY RESILIENT TO EXTERNAL PRESSURES, THOUGH ADDRESSING ECONOMIC IMPACT OF PANDEMIC SCARRING WILL TAKE TIME
In Moody's view, the rebound in economic activity since mid-2021 has been strong and will be resilient to the current challenges posed by the turn in global credit conditions over the near-term. The Philippine economy is not significantly exposed to Russia, although the European Union has historically been an important source of investment and demand for the country's goods and services exports. Moreover, the Philippines is less dependent on external demand as compared to Asia-Pacific peers given its relatively large domestic market, which in turn is further supported by stable remittance inflows from overseas Filipinos. External balances have been pressured by elevated prices for global commodities, exacerbating inflationary pressures that threaten to dampen consumption given the high proportion of the consumption basket comprised of food and energy items and low GDP per capita. However, Moody's sees sufficient momentum to support real GDP growth of 6.6% for 2022 and 6.2% for 2023, as price pressures are set to moderate as commodity prices ease from peaks recorded earlier this year.
Over the long term, Moody's continues to view the Philippines as characterized by higher economic growth relative to most Baa-rated peers, with favorable demographics balanced against a heightened susceptibility to environmental risks given the high incidence of climate-related shocks. However, strict and prolonged pandemic containment restrictions contributed to a delayed recovery from the coronavirus shock, in turn leading to severe economic scarring – as represented by one of the largest cumulative economic output losses among rated sovereigns – and a deterioration in Moody's assessment of economic strength. Other manifestations of economic scarring, especially in relation to the impact of the prolonged shuttering of schools during the pandemic and the reversal of the gains in poverty reduction, has the potential to curtail potential growth over the long-term if left unaddressed.
POLICY CONTINUITY SUPPORTS POST-PANDEMIC FISCAL RECOVERY
Following the conclusion of general elections in May 2022, the appointment of a technocratic Cabinet supports Moody's view of a continuation of policy orthodoxy and commitment to reform. The introduction of a medium-term fiscal framework provides assurance with regards to the outlook for gradual fiscal consolidation and debt stabilization, underscored by the emphasis on broadening revenue and developing infrastructure carried over from previous administrations. Moody's expects the general government deficit to gradually narrow from a pandemic peak of 5.8% of GDP in 2020 to 4.0% in 2022 and below 3% in 2023.
Based on Moody's projection of general government debt peaking at around 54% of GDP in 2022, the Philippines' government debt burden remains consistent with its Baa-rated peers, while its debt affordability did not significantly deteriorate following the large pandemic-induced rise in debt since 2019. Moreover, the Philippines' external position remains comfortably positioned to meet forthcoming cross-border debt servicing obligations and weather capital flow volatility owing to tightening global liquidity conditions, notwithstanding the weakening of the current account, an erosion in the stock of foreign currency reserves and related depreciation of the peso since early 2022. The banking system also remains financially sound and has been able to accommodate the recovery in the demand for credit, thus aiding in the broader normalization of economic activity.
RATIONALE FOR STABLE OUTLOOK
The stable outlook reflects the view that the recovery from the acute shock posed by the coronavirus pandemic 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 damaged more significantly than Moody's currently assumes, or that fiscal and economic reform momentum does not resume, leaving the Philippines' economic and fiscal strength somewhat weaker.
ENVIRONMENTAL, SOCIAL, AND GOVERNANCE (ESG) CONSIDERATIONS
The Philippines' moderately negative (CIS-3) ESG Credit Impact Score reflects high exposure to environmental risks and social risks, contained by institutional and economic resilience.
The Philippines' E issuer profile score is highly negative (E-4), given the high incidence of climate- related shocks, including typhoons and extreme precipitation leading to flooding. In addition, the relatively large, albeit declining, share of the labor force employed by the agricultural sector heightens the country's susceptibility to heat stress given the periodic episodes of drought. Inadequate and intermittent access to clean water, as well as issues with regards to waste and pollution, add to the Philippines' exposure to environmental risks.
The sovereign's S issuer profile score is highly negative (S-4), given pervasive levels of poverty and consequently low overall levels of wealth. In the context of rapid economic growth over the past decade, income inequality remains high while development gaps persist between large urban centers and rural areas. Labor markets feature a high share of informal employment, which is partially mitigated by household income support via remittances. Despite traction on socioeconomic reform, inadequate provision of healthcare and lack of sufficient access to basic services and housing contribute to social risks. Like many other emerging economies, the Philippines benefits from a benign demographic structure.
Governance is broadly in line with other sovereigns and does not pose specific risks, as captured in the neutral-to-low G issuer profile score (G-2). Strong macroeconomic and fiscal policy effectiveness compensates for comparatively weak political and legal governance, while providing some capacity to respond to environmental and social risks.
GDP per capita (PPP basis, US$): 9,175 (2021) (also known as Per Capita Income)
Real GDP growth (% change): 5.7% (2021) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 3.1% (2021)
Gen. Gov. Financial Balance/GDP: -4.6% (2021) (also known as Fiscal Balance)
Current Account Balance/GDP: -1.8% (2021) (also known as External Balance)
External debt/GDP: 27.0% (2021)
Economic resiliency: baa1
Default history: No default events (on bonds or loans) have been recorded since 1983.
On 12 September 2022, a rating committee was called to discuss the rating of the Government of the Philippines,. The main points raised during the discussion were: The issuer's economic fundamentals, including its economic strength, have materially decreased. The issuer's institutions and governance strength, have not materially changed. 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.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Moody's would consider upgrading the Philippines' sovereign rating upon 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 pandemic. Together, a resumption of sustained high growth and rapid restoration of fiscal strength would denote particularly effective macroeconomic and fiscal policy.
Factors that would prompt a downgrade of the Philippines' sovereign rating include a greater deterioration in fiscal and government debt metrics relative to peers or an erosion of the country's external payments position that threatens liquidity conditions. The reversal of reforms that have supported prior gains in economic and fiscal strength, as well as substantial deterioration in institutions and governance strength would also be negative.
The principal methodology used in these ratings was Sovereign Ratings Methodology published in November 2019 and available at https://ratings.moodys.com/api/rmc-documents/63168. Alternatively, please see the Rating Methodologies page on https://ratings.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 on https://ratings.moodys.com/rating-definitions.
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 issuer/deal page for the respective issuer on https://ratings.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 https://ratings.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://ratings.moodys.com/documents/PBC_1288235.
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 https://ratings.moodys.com.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on https://ratings.moodys.com.
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Christian de Guzman
Senior Vice President/Manager
Sovereign Risk Group
Moody's Investors Service Singapore Pte. Ltd.
71 Robinson Road #05-01/02
Singapore, 068895
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Marie Diron
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
71 Robinson Road #05-01/02
Singapore, 068895
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
