Japan Credit Rating Agency Affirms Philippines’ A- rating, Keeps ‘Stable’ Outlook: Debt Watcher Cites Sound Macroeconomic Fundamentals That Support Solid Recovery

​Japan Credit Rating Agency (JCR) affirmed the Philippines' credit rating of 'A-' with a 'stable' outlook, citing soundness of the country's external payments position, fiscal situation, and banking sector, as well as efforts toward strong economic recovery from the COVID-19 crisis.

With this development, the Philippines has so far kept intact all its investment grade credit ratings with all major regional and international debt watchers despite the crisis, which has brought a wave of rating downgrades globally.

In a report released Monday, the Japan-based debt watcher said that on the back of the country's sound macroeconomic fundamentals, the Philippines enjoys favorable growth prospects once the COVID-19 crisis settles.

JCR noted that while the Delta variant has posed challenges on the Philippine economy's recovery in the short term, 'the government has been swiftly implementing adequate measures, such as increased public health-related expenditures, acceleration of vaccination, and continuation of employment programs by drawing upon its relatively strong fiscal position before the pandemic.'

Under the government's latest estimates, the economy will grow anywhere between 4.0 and 5.0 percent this year, 7.0 and 9.0 percent next year, and 6.0 and 7.0 percent in 2023 and 2024.

In response to JCR's latest credit rating decision on the Philippines, Finance Secretary Carlos Dominguez III said, 'We thank JCR for seeing through the short-term challenges confronting the Philippines and recognizing the Duterte administration's scaled-up efforts to put the economy back to its high-growth path. Such recovery programs include the faster COVID-19 vaccination deployment; accelerated infrastructure development; and continued push in the Congress for further reforms to super-charge the economy and modernize taxation.'

'The Philippine government aims to achieve a strong and quick economic recovery through sustained spending on its priority programs and productive investments while maintaining deficit and debt manageability. We are not passing on unsustainable debts to future generations, even as we continue to spend more on pandemic response and on economic recovery to ensure robust medium- and long-term growth prospects for the Philippines,' Secretary Dominguez added.

Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno said, 'The BSP has done quite a lot to cushion the impact of the crisis on the vulnerable sectors through a long list of banking regulatory relief measures. We also did a lot to maintain ample liquidity in the financial system, which in turn has kept market confidence on the Philippines throughout the crisis. We will continue to support the economy as needed, until we see hard evidence of full recovery.'

'Meantime, the Philippines enjoys ample buffers against external shocks, with our gross international reserves providing more than one year worth of import cover. These buffers, along with the country's favorable credit ratings, will continue to provide support to the Philippine peso. The BSP remains committed to prudent management of the country's external accounts, which will shield the economy from material damages from external shocks-such as capital flight amid the pending policy normalization of the US Federal Reserve-as the world traverses the COVID-19 crisis.'

Echoing opinion on the strength of the Philippines' external payments position, JCR cited that the country's GIR exceeds its external debt. The GIR, which amounted to USD 107.2 billion as of end-July this year, was 7.7 times the country's short-term external debt. 'Therefore, JCR holds that the country will show its high resilience even when global risk-off moves are triggered again,' it said.

On the country's banking sector, JCR acknowledged that despite the rise in bad debts, banks have ample buffers to absorb credit losses, with their average capital adequacy ratio (CAR) hovering in the 15-percent level, well above the BSP's regulatory requirement of 10 percent and the internationally prescribed 8 percent.

Citing the government's push for infrastructure development at the backdrop, JCR said 'the country's potential growth will recover and the economy is expected to return to a high growth path.'

From an average of 2.9 percent of gross domestic product (GDP) between 2011 and 2016, the government's infrastructure spending significantly increased in recent years to 5.4 percent in 2019 and 4.8 percent last year, and is programmed to be above 5 percent this year amid the government's 'Build, Build, Build' program.

JCR also noted the soundness of the country's fiscal policy, projecting that the government's debt will remain within the level of 50 percent of GDP despite the huge cost of pandemic relief and response measures.

The A- rating from JCR bodes well for the Philippine government's future issuances of Samurai bonds, as some Japanese funds invest only in government securities issued by sovereigns that have a rating of at least A-.

The last time the Philippines tapped the Samurai bond market was in March this year, when the government successfully issued JPY 55.0 billion (or Php24 billion) worth of zero-coupon Samurai bonds.