July 19, 2022

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Fitch lowers PHL GDP forecast

FITCH RATINGS lowered its gross domestic product (GDP) growth forecast for the Philippines to 6.5% this year, from 6.9% previously, citing continued inflationary pressures due to high prices of food and other commodities.

The revised forecast is within the Philippine government’s GDP growth target band of 6.5-7.5% this year.

“We expect economic activity to remain strong over the next few quarters in those sectors and from infrastructure development. We forecast growth of 6.5% in 2022 and 6.3% in 2023, which would support the credit outlook,” Fitch Ratings analyst for the Philippines Sagarika Chandra said in a research note.

Fitch Ratings’ 6.3% GDP forecast for 2023 is lower than the Development Budget Coordination Committee’s (DBCC) 6.5-8% target for 2023 to 2028.

“Inflationary pressures from high commodity and food prices and the ongoing economic recovery, are a risk to growth. Inflation is high relative to some regional peers, at 6.1% in June. The Philippines is a net oil importer and does not have any significant fuel subsidies,” Ms. Chandra said.   

June inflation was the fastest in nearly four years, and exceeded the Bangko Sentral ng Pilipinas’ (BSP) 2-4% target band for a third straight month. This brought the six-month average inflation to 4.4%, still below the BSP’s 5% full-year projection.

Fitch Ratings said it expects further monetary policy tightening by the BSP through 2023.

The BSP has raised its key policy rate by 125 basis points (bps) so far this year, bringing it to 3.25%, in order to tame inflation.

BSP Governor Felipe M. Medalla said he would not rule out another interest rate increase in August.   

CREDIT RATING
Meanwhile, Fitch Ratings said the impact of the Marcos administration on the Philippines’ “BBB” credit rating will depend on its policy agenda and its implementation.

“Our view on the ‘negative’ outlook will be determined by the extent to which the policy agenda will reduce uncertainty, in particular about the medium-term prospects for growth and public debt,” Ms. Chandra said.   

In February, the debt watcher affirmed the Philippines’ “BBB” rating -— a notch above minimum investment grade — with a “negative” outlook.

Fitch lowered the Philippines’ credit rating outlook to “negative” from “stable” in July last year due to the impact of the pandemic.

Ms. Chandra said the Marcos administration’s economic policy is assumed to be broadly in line with existing policies.

“In particular, we foresee the government maintaining a focus on infrastructure investment, a key driver of the country’s favorable medium-term growth prospects, which support the sovereign rating,” she said.   

President Ferdinand R. Marcos, Jr. is widely expected to continue the previous administration’s “Build Build Build” initiative.

“A sustained broadening of the government’s revenue base that enhances fiscal finances and places the government debt-to-GDP ratio on a durable downward trajectory would be positive for the credit profile,” Ms. Chandra said.

Finance Secretary Benjamin E. Diokno earlier said he will strengthen tax administration to generate additional government revenues.

“Under our baseline, the Philippines’ government debt-to-GDP ratio peaked in 2021 at 54.1% and will decline over the next few years, with the general government deficit narrowing to 3.9% by 2024. These forecasts are based on growth averaging 6.4% in 2022-2024,” Ms. Chandra said. — Keisha B. Ta-asan