Significant China slowdown may hurt PHL credit rating

A SIGNIFICANT SLOWDOWN in China’s economic growth due to further coronavirus disease 2019 (COVID-19) outbreaks will likely hurt the sovereign ratings of Asia-Pacific (APAC) economies, including the Philippines, Fitch Ratings said.

In a report “APAC Exposure to Slower China Growth,” Fitch Ratings said more COVID-19-driven economic shocks in China will likely have “clear negative” economic effects for Asian countries since China is the biggest export market for most.

“Additional pandemic-related disruption in China could affect economic, fiscal and external prospects for other APAC sovereigns and territories, with possible credit implications through channels such as trade, tourism and financing,” it said.

A China slowdown will be the third major external shock for Asian economies, after the pandemic and the Russia-Ukraine war.

“Successive shocks could further erode fiscal space and exacerbate credit risks in frontier markets, potentially eroding their political and institutional stability. Weaker near-term economic growth prospects would weigh on credit metrics for APAC sovereigns. Post-pandemic fiscal consolidation could be set back or reversed due to weaker growth or the use of fiscal stimulus to offset the external shock,” Fitch said.

China is the Philippines’ main import partner, accounting for 22.7% of total imports in 2021. Around 15.5% of Philippine exports went to China in 2021.

However, Fitch said the Philippines is less exposed to these shocks relative to its APAC neighbors, as most have higher reliance on Chinese imports.

Weaker growth in China may affect countries, such as the Philippines, Hong Kong, Thailand, Sri Lanka and Vietnam, whose tourism sectors rely heavily on Chinese tourists, it added.

The Philippines also relies less on bilateral lending from China, compared to other APAC countries.

In case China’s growth is slower than current forecasts, Fitch said slower growth and weaker global investor sentiment will weigh on other Asia-Pacific sovereign ratings.

“The effects across the APAC region may be largely transitory, but this additional shock after the pandemic and the Russia-Ukraine war may raise the risk of economic scarring that could weigh on medium-term growth prospects,” Fitch said.

“Ratings that are sensitive to this risk, with relatively limited headroom, such as that of the Philippines, could face downgrade pressure,” it added.

Fitch Ratings in February maintained the country’s investment grade “BBB” rating, as well as the “negative” outlook as it flagged uncertainties in the country’s medium-term growth and hurdles to bringing down debt. A negative outlook means a downgrade is possible within the next 12 to 18 months.

The Philippines has kept the “BBB” rating, which is one notch above the minimum investment grade, since December 2017.

The Philippines’ debt-to-gross domestic product (GDP) ratio stood at 63.5% as of end-March, beyond the 60% limit prescribed by multinational lenders. This comes as a result of the country’s aggressive borrowing to fund its pandemic response in 2020.

The government is aiming to bring down the debt-to-GDP ratio to 61.8% by yearend, and is expected to steadily drop to 61.3% by next year all the way to 52.5% by 2028. — D.G.C.Robles