NextGen Day

MANILA – Fitch Ratings expects the government’s infrastructure program to be continued in the upcoming administration, as it is seen as a critical component of the economy’s good medium-term outlook.

In a May 12 assessment, the debt rating agency stated that presidential candidate Ferdinand Marcos Jr. received a clear mandate based on the unofficial results of the May 9 polls, which is a bonus if the existing administration’s policies are to be maintained.

“Our baseline assumption is that the Philippines will maintain its sound policy framework and return to strong medium-term growth following the Covid-19 (coronavirus disease 2019) pandemic, but the Negative Outlook on the Philippines’ rating, which we affirmed in February 2022, reflects the uncertainty surrounding this outcome, as well as possible challenges in reducing government debt following the pandemic policy response,” it said.

Fitch Ratings has assigned the Philippines an investment-grade rating of ‘BBB’ with a negative outlook.

According to the credit rating agency, the economic damage caused by the virus-induced pandemic is projected to be mitigated by investments aimed at closing the country’s infrastructural gap.

“However, the efficiency of investment is crucial. “A decline in governance standards could suffocate the positive impact of investment on productivity growth over time,” it noted.

“Poorly managed public infrastructure investment might potentially contribute to a government debt rising faster than nominal GDP (gross domestic product) over the medium term, putting pressure on the sovereign rating,” according to the research.

It noted the impact of the High Court’s 2018 judgment, which increased local government units (LGUs) share of national government money beginning this year, on public spending efficiency is still to be observed.

“At the general government level, the current administration forecasts that the transfers will be fiscally neutral because it aims to transfer expenditure allocations in tandem to local government entities. Poor execution, on the other hand, could result in local governments underspending,” it noted.

While this will have a significant impact on the economy’s medium-term development potential, “net credit consequences are likely to be negative, even if public finances may improve in the near term,” according to the research.

“This could hinder rice imports and push up the cost of rice,” the report warned of Marcos’ campaign promise to suspend the rice tariffication law.

“Amending the statute may reduce tax income.” The Philippines’ low tax take is a credit vulnerability, and when we affirmed the rating in February, we warned that reversing tax changes and resulting in sustained greater fiscal deficits might lead to a downgrade,” it stated.

It stated that until members of the new Cabinet, particularly the economic team, are completed, a better evaluation of the next government’s policy program may be established.

“The incoming president’s ability to pass legislation will also be determined by the dynamics of the new Congress.” The results of the congressional elections have yet to be confirmed, but the report predicts that the body “will not constitute a significant impediment to the president’s legislative agenda’s eventual passage.”

Despite a little weakening of the peso and increased pressure on the goods trade deficit in recent months amid higher global energy prices, it continues to expect external buffers to support the economy’s credit strength.

“In the aftermath of the pandemic, a gradual reopening of the economy to tourists should support the country’s external position this year, and official reserve assets stood at a comfortable USD107 billion at the end of April 2022, only slightly down from USD109 billion at the end of 2021,” it added.

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