Fiscal authorities urged to revisit debt-to-GDP strategy

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As credit downgrades approach, an economist believes the country’s fiscal authorities may need to rethink their current debt-to-gross domestic product (GDP) reduction strategy.

Fitch Ratings downgrading of the Philippines’ investment-grade rating from stable to negative highlighted the damaging effects of the prolonged downturn in economic activity, as well as how weak growth could affect the country’s overall fiscal health, ING Bank Manila senior economist Nicholas Antonio Mapa said in a Thursday commentary. 

“From this prognosis, it is quite clear that debt watchers are now increasingly concerned about the medium-term growth prospects for the Philippines, suggesting that the so-called ‘solid fundamentals’ are now being questioned,” he added. 

“With only base effects providing momentum for 2021 GDP growth, perhaps the once robust consumption crazy, investment renaissance economy is now only something that was ‘so 2019.’”

Credit rating agencies are also likely to be concerned by the Philippines’ current debt-to-GDP ratio, which is more than 60 percent of GDP, according to Mapa.

He went on to warn that when debt monitors reach 60 percent, they start to worry, and this has already caught Fitch’s concern.

“One can only guess that the other two, Moody’s [Investors Service] and S&P [Global Ratings] are likely monitoring this metric very closely as a prolonged sortie into 60 percent territory could be a recipe for downgrades.”

Thus, Mapa urged that, “Authorities may need to revisit their current debt-to GDP alleviation strategy as credit downgrades, something they so meticulously avoided, loom.”

“Perhaps a revised game plan to chase faster growth can be considered?”

He emphasized that faster growth creates revenue streams and jobs, and that “penny pinching” has led in five quarters of negative GDP.

“And although authorities tout ‘strong’ GDP by Q2 (second quarter) onwards, we are all aware that a 20.3 percent GDP expansion will be needed to wipe out the -16.9 percent drop recorded in 2Q 2020.”

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