By Justine Irish D. Tabile, Senior Reporter
THE PHILIPPINES might miss its goal of achieving an “A”-level credit standing inside the subsequent two years as one other debt watcher cut its outlook for the country, with the Middle East war and slowing public investments putting the country’s growth prospects in danger.
On Monday, Fitch Rankings affirmed the Philippines’ long-term foreign-currency issuer default rating at “BBB” but downgraded its outlook to “negative” from “stable.”
“The outlook revision reflects rising risks to the Philippines’ strong medium-term growth prospects from recent disruptions to public investment, exacerbated within the near-term by elevated exposure to the continuing global energy shock. These challenges could narrow the country’s GDP (gross domestic product) growth outperformance relative to peers, amid higher post-pandemic government debt and a gradual and sustained deterioration in its external finance position,” it said.
“The affirmation reflects our baseline that, despite rising risks, medium-term GDP growth will remain robust, supporting a gradual reduction in government debt.”
A “negative” outlook from a credit rater means it sees the next likelihood of a downgrade over the subsequent two years.
The federal government is aiming to realize an “A” level rating by 2028 or the tip of the Marcos administration.
Fitch last gave the Philippines a “negative” outlook in 2021 throughout the coronavirus pandemic, which it later affirmed throughout 2022. This was revised back to “stable” in May 2023.
Earlier this month, S&P Global Rankings also revised its outlook for the Philippines to “stable” from “positive” but affirmed the country’s “BBB+” long-term rating because it expects the country’s fiscal and external position to come back under pressure because of the Middle East conflict.
War-driven shocks are prone to upset growth and inflation outcomes as they discourage investment and household consumption, said GlobalSource Partners Philippine Analyst and Principal Advisor Diwa C. Guinigundo, who can also be a former central bank deputy governor.
“In the method, it may additionally increase the country’s risk profile and further moderate the expansion momentum,” he said in a Viber message.
“If these geopolitical risks should proceed beyond this yr, and no decisive policy actions are forthcoming, achieving an ‘A’ investment grade rating couldn’t occur within the last two years of this administration.”
Fitch’s move to downgrade its rating outlook reflects the country’s high exposure to risks from the Iran war, he added.
“We’re overly depending on imported oil, our fiscal space continues to narrow, and inflation is prone to breach the goal for 2026.”
Reyes Tacandong & Co. Senior Adviser Jonathan L. Ravelas said the “negative” outlook is a “reality check” relatively than a crisis.
“The upgrade story is clearly over, and the Philippines is now in defense mode. Other agencies could revise outlooks, but a downgrade will not be imminent so long as growth stabilizes, inflation is contained and monetary execution improves,” he said in a Viber message.
“The chance is obvious: if oil prices stay high and the current-account deficit widens and not using a strong policy response, the cushion protecting our ‘BBB’ rating gets very thin.”
Surging oil prices and dwindling fuel reserves have pushed the Philippine government to place the country under a one-year state of national energy emergency and suspend excise taxes on liquefied petroleum gas and kerosene.
The Bangko Sentral ng Pilipinas (BSP) expects inflation to average 5.1% this yr, well above its 2%-4% goal and last yr’s 1.7% print, because the conflict’s impact on global crude oil prices is prone to push up domestic food, energy, and transport costs.
In March, the buyer price index already breached the central bank’s goal because it accelerated to 4.1% because of rising fuel prices.
For its part, Fitch sees inflation averaging 4.1% in 2026. “Risks are tilted towards higher inflation if the shock is prolonged, adding to affordability challenges for households.”
FISCAL CONCERNS
Mr. Guinigundo added that interventions needed to cushion the economic impact of the war could affect the country’s fiscal position.
“The medium-term fiscal consolidation could also be delayed due to the need for fiscal support to the economy, including those for vulnerable sectors,” he said. “That might further erode market confidence within the country’s economic prospects.”
He said, “mitigating measures could also be difficult to ascertain at this point because the issues are structural, and they can’t be done within the short term.”
“We should always have done our homework a long time ago.”
Fitch said it expects the federal government’s fiscal consolidation plan to proceed progressively over the subsequent few years.
“We expect the final government fiscal deficit to be regular at 3.7% of GDP in 2026. That is consistent with a stable National Government deficit of 5.6% of GDP, barely above the 5.3% budget goal, as we expect weaker growth to weigh on revenues. Targeted energy subsidies limit fiscal risks, though a protracted energy shock could lead on to fiscal risks from greater social pressures to spice up spending,” it said.
“Risks are tilted toward a slower pace of deficit reduction as we imagine the federal government is prone to prioritize GDP growth objectives and social stability.”
The conflict’s impact on the country’s credit profile will likely manifest through “lower GDP growth, higher inflation and a rising current account deficit, with modest risks to public funds,” it added.
It expects the economy to expand by 4.6% this yr, below the federal government’s 5%-6% goal, because it sees public spending — which was stalled by a graft scandal tied to flood control projects, resulting in a post-pandemic-low GDP growth of 4.4% in 2025 — recovering only progressively. Higher energy costs amid the war could also hit household consumption, a key growth engine.
“Investment, in level terms, since 2021 has run below its pre-pandemic trend and is under further pressure amid the recent pullback in public investment. This adds headwinds to our just over 6% medium-term growth assumption. Public capex (capital expenditure) is a very important component of our medium-term outlook because it addresses infrastructure gaps and crowds in private investment,” Fitch added.
“Efforts to enhance governance around capex disbursements are positive but could lead to lower infrastructure spending and GDP growth multipliers in the approaching years. Nonetheless, successful capex governance reforms, and efforts to deepen private sector involvement, could enhance the standard and efficiency of spending that might keep GDP growth multipliers high even when spending is lower.”
LONG-TERM PROSPECTS INTACT
Palace Press Officer Clarissa A. Castro, citing the Department of Finance, said that the “negative” outlook doesn’t mean an impending sovereign rating downgrade.
“Fitch also explicitly highlighted the federal government’s decisive and proactive response to global challenges, particularly the energy shock,” she said at a news briefing on Tuesday.
The federal government’s efforts to declare a state of national energy emergency and implement fuel-saving strategies “display agile and responsible economic management, which continues to strengthen market confidence.”
“Apart from that, the Philippines continues to enjoy strong access to global capital markets supported by a diversified investor-based and sustained demand for its Republic of the Philippines issuances,” she said.
“These are clear indicators of investors’ trust within the country’s long-term trajectory.”
The Finance department largely attributed the outlook cut to the situation within the Middle East.
“The revised outlook was brought on by the external geopolitical shock coming from the Middle East. The affirmation of our rating reflects our strong economic fundamentals and sound fiscal position,” it said. “The Philippine economy stays on solid footing with a sturdy domestic market, stable economic system, and recognized reforms.”
“The economy stays in a very good position because growth is robust, and banks are in fine condition,” BSP Governor Eli M. Remolona, Jr. said in an announcement on Monday. “The BSP is closely monitoring the impact of upper oil prices and geopolitical developments, particularly the conflict within the Middle East, on inflation and the general Philippine economy.”
The central bank’s policy-setting Monetary Board will meet on Thursday (April 23), where some analysts expect a preemptive rate hike to assist keep inflation expectations in check as they expect second-round price effects from the war-driven oil shock to emerge soon.