Flood control fiasco imperils Philippines’ credit rating — Fitch Ratings

By Katherine K. Chan

THE Philippine economy continues to bear the brunt of the ongoing flood control corruption scandal, Fitch Ratings said, noting that further unrest could spill over to the country’s credit rating.

Fitch Ratings Head of Asia-Pacific Sovereigns Thomas Rookmaaker said the controversy surrounding the anomalous government flood control projects threatens the country’s political stability, fiscal policy implementation, as well as business and consumer confidence.

“We believe that the flood control corruption scandal in the Philippines poses an ongoing risk to political stability, fiscal policy execution, and business and consumer confidence,” Mr. Rookmaaker told BusinessWorld in an e-mail.

Government officials, lawmakers and contractors have been accused of getting billions of pesos in kickbacks from substandard or nonexistent flood control projects. This has triggered widespread protests, slowed government spending, and hurt investor and consumer sentiment.

“The overall impact the scandal will have on the Philippines’ public finances is still uncertain,” Mr. Rookmaaker said.

“Public investment spending is likely to remain weak for quite some time, but continued social unrest could simultaneously lead to spending pressures to head off public discontent.”

In October, government spending fell for a third straight month to P430.6 billion, down 7.76% from P466.8 billion a year ago. Revenues likewise slipped by 6.64% to P441.7 billion from P473.1 billion last year.

Mr. Rookmaaker noted that the immediate impact of the scandal was reflected in the sharp economic slowdown in the third quarter.

Philippine gross domestic product (GDP) expanded by an over four-year low of 4% in the third quarter, as household final consumption expenditure and government spending slowed amid the corruption mess.

For the first nine months, GDP growth averaged 5%, well-below the government’s 5.5-6.5% full-year target.

Public investments likewise took a hit from the corruption issues, he added.

In the third quarter, foreign investment pledges approved by investment promotion agencies plunged by 48.7% to P73.68 billion, Philippine Statistics Authority data showed.

“Persisting social tensions could become more of a drag on growth if confidence among foreign and domestic investors suffers,” the Fitch analyst said. “Tensions could also serve as a distraction for policymakers, impeding the passage of reforms that have the potential to enhance economic productivity and competitiveness.”

Mr. Rookmaaker said implementing reforms to enhance accountability and governance could bolster private investments and promote growth in the medium term.

Still, he noted that continued instability may negatively impact the debt watcher’s outlook on the Philippine economy, which could potentially lead to a credit rating downgrade.

“If social unrest would reduce our confidence in strong, stable medium-term economic growth and continued adherence to sound economic policies, this could lead to negative rating action,” Mr. Rookmaaker said.

“Failure to maintain a stable government (debt-to-GDP) ratio, for example due to scaling back fiscal consolidation further to support growth, or a significant deterioration in the foreign currency reserve buffers, could also put the rating under downward pressure,” he added.

Fitch Ratings last affirmed its “BBB” long-term foreign currency issuer default rating and “stable” outlook for the Philippines in April. A “stable” outlook means the Philippines will likely maintain its rating in the next 18 to 24 months.

Budget Undersecretary and Principal Economist Joselito R. Basilio said in October that Fitch Ratings had “verbally” affirmed its outlook on the Philippines.

However, in a separate report, Mr. Rookmaaker noted that the Philippines’ ongoing fiscal measures amid the economic slowdown may dampen fiscal consolidation and cause public debt to worsen.

He added that social unrest due to the widening corruption issues could intensify next year, raising further fiscal and economic risks.

“Bouts of political unrest have the potential to weigh on sovereign economic and fiscal performance, and to influence governance standards and institutions,” he said in Fitch Ratings’ Asia-Pacific Sovereigns Outlook 2026 dated Dec. 8.

Still, Mr. Rookmaaker said the country could keep its credit rating by improving governance standards to match its peers and bringing government debt ratios well below the “BBB” median.

“Stronger medium-term growth and continued adherence to sound macroeconomic policies, supporting faster convergence of GDP per capita towards peer levels, could also improve the sovereign credit profile,” he added.