Philippine growth unlikely to top 6% in medium term — Moody’s

By Katherine K. Chan, Reporter

MOODY’S RATINGS said the Philippines’ medium-term growth outlook seems bleak as its slow investment recovery and vulnerability to climate-driven shocks may derail its economic rebound.

In a statement following its latest rating action on the Philippines, the debt watcher said the country’s gross domestic product (GDP) growth is expected to hover below its pre-pandemic level of around 6% over the medium term.

“The Philippines’ medium-term growth will continue to be underpinned by favorable demographics, resilient remittances and service exports, and a gradual strengthening of investment as confidence recovers, with electronics and other goods exports providing a more marginal offset,” Moody’s Ratings said late on Monday.

“Even so, we expect medium-term potential to settle somewhat below the near-6% pace recorded before the pandemic, as investment recovers only gradually and the economy remains exposed to recurrent natural disasters and climate-related shocks,” it added.

Moody’s slashed its Philippine GDP growth forecast for this year to 3.6% from 5.5%. This falls near the bottom end of the government’s 3.5%-4.5% target for the year.

In the second quarter, GDP growth tumbled to a new post-pandemic low of 2.3%, bringing average growth to 2.6% in the first half.

The fourth consecutive quarter of slowing growth came as investments continued to reel from last year’s flood control corruption scandal, while rising prices amid the Middle East war squeezed household spending.

Moody’s Ratings noted that the Middle East war shocks and investment slump are “largely cyclical,” with an investment-driven recovery expected later this year. 

“The recovery from the second half of 2026 should be led by a rebound in public investment as the government resumes stalled disbursements and normalizes spending execution,” it said.

Moody’s Ratings said that local investments should focus on public infrastructure and public-private partnerships, especially in renewable energy “as the country diversifies its energy mix in response to the recent shock.”

The government’s recent reforms should also eventually boost investment and productivity as their benefits are realized, the debt watcher said.

These include the Corporate Recovery and Tax Incentives for Enterprises to Maximize Opportunities for Reinvigorating the Economy Act, foreign investment liberalization, and allowing more private and foreign participation in sectors such as renewable energy.

By 2027, Moody’s Ratings expects GDP to expand by 5.3%, although still slower than its previous estimate of 5.6%.

The Development Budget Coordination Committee sees the country’s GDP expanding between 5% and 6% next year until 2030.

Moody’s on Monday affirmed the Philippines’ “Baa2” credit rating with a “stable” outlook on the back of its projection that gradual growth recovery and fiscal consolidation efforts will stabilize the country’s fiscal position over the next two years.

In separate statements, Bangko Sentral ng Pilipinas (BSP) Governor Eli M. Remolona, Jr. and Finance Secretary Frederick D. Go welcomed Moody’s rating affirmation.

“Moody’s assessment confirms our strong macroeconomic fundamentals, and that the reforms we’ve put in place are working,” Mr. Go said.

For his part, Mr. Remolona vowed that the central bank will ensure inflation eases back to its target and strengthen the country’s financial system.

“On the part of the BSP, we will continue working to bring inflation back close to target, safeguard the soundness of the country’s banking system, promote a safe and efficient payments and settlements system, and prudently manage the country’s international reserves,” the central bank chief said in a separate statement.

“These efforts help preserve macroeconomic and financial stability, which supports sustainable and inclusive growth,” he added.

So far, Moody’s Ratings is the sole major debt watcher that maintained its rating and outlook for the Philippines.

In April, S&P Global Ratings downgraded the Philippines’ credit outlook to “stable” from “positive,” although it affirmed the country’s “BBB+” long-term investment grade rating and “A-2” short-term rating.

Fitch Ratings likewise revised its outlook to “negative” from “stable,” but retained its “BBB” long-term foreign-currency rating.

The National Government is aiming to secure an “A” level credit rating by 2028 or the end of the Marcos administration.

University of Asia and the Pacific Economist Marco Antonio C. Agonia said achieving the “A” rating may be more difficult as the Philippines’ weak medium-term prospects threaten the government’s fiscal consolidation efforts.

“A persistent subdued growth narrative may imperil the country’s debt consolidation plans and its bid towards ‘A’ credit rating status,” he told BusinessWorld in an e-mail.

Mr. Agonia noted that the lack of substantial growth could prevent the country from narrowing its debt-to-GDP ratio down to the 60% threshold deemed sustainable for developing countries.

“Historically, fiscal consolidation plans were focused on outgrowing the increase in debt stock through sustained increases in economic growth. In the absence of substantial growth, we may not be able to quickly return below the 60% debt-to-GDP level,” he said.

In the second quarter, the country’s debt-to-GDP ratio ballooned to its highest in over two decades at 66% as its debt stock swelled to an all-time high of P19.07 trillion at end-June.

The government expects the country’s debt-to-GDP ratio to settle between 60% and 63% this year, according to the Philippine Development Plan 2023-2028 Midterm Update. It is projected to decline to 59%-62% next year and fall further to 58%-61% by 2028.