Moody’s sees no imminent PHL rating downgrade

By Katherine K. Chan, Reporter

MOODY’S RATINGS is unlikely to downgrade the Philippines’ credit rating in the near-term despite emerging risks from the Middle East war considering the country’s strong external position and reserves buffer, its analysts said.

However, Young Kim, associate vice-president and analyst at Moody’s Sovereign and Sub-Sovereign Risk Group, said a prolonged conflict in the Middle East could imperil the Philippines’ credit rating amid potential inflation acceleration, a wider current account deficit and a slowdown in remittance flows.

“So, in our view, at least on the baseline, we don’t see (an) imminent rating action downgrade or negative type of action on the Philippines, per se,” he said in a virtual media briefing on Tuesday. “But that really depends on, again, the severity and duration of the conflict, as well as some of the government’s responses to the crisis.”

Mr. Kim said that they expect the war to be short-lived and will likely have minimal impact on the global economy.

Moody’s Ratings last affirmed the Philippines’ investment-grade “Baa2” rating and “stable” outlook in August 2024.

A stable outlook means the debt watcher’s rating for the Philippines will likely remain unchanged over the next 12 to 18 months.

In the coming months, Moody’s Ratings will turn its focus on uncertainties surrounding the Middle East war as the Philippines’ heavy reliance on imported oil from the region exposes the country to more risks, Mr. Kim said.

“The key thing we are looking (at) is around how long the severity and duration of the impact from this conflict, because if you look at the Philippines, it is, you know, one of the countries that are vulnerable to a supply shock from the conflict, as we mentioned in our downside scenario,” he said.

Local pump prices have surged to above P100 per liter three weeks into the war involving Iran, Israel and the United States.

The Philippines imports about 98% of its oil from the Middle East, making it highly vulnerable to the ongoing oil trade disruptions in the region and the partial closure of the Strait of Hormuz, where around a fifth of the global oil supply passes through.

Domestic oil firms have imposed oil price increases for three consecutive months, with gas prices climbing anew by P12.90 to P16.60 a liter, diesel by P20.40 to P23.90 a liter and kerosene by P6.90 to P8.90 a liter this week.

Mr. Kim noted that Philippine inflation could accelerate above 4% or the upper bound of the Bangko Sentral Pilipinas’ (BSP) target if global oil price holds above $100 per barrel.

“(I)f it were to spur the oil prices hovering above $100 and that further impact the broad inflation expectations beyond the energy prices to broad import prices, obviously, we (will) likely have inflation that is above 4% in that scenario,” he said.

This will likely tighten financial conditions and complicate the BSP’s monetary policy, he added.

In February, inflation picked up to an over one-year high of 2.4% as costlier oil weighed on consumer prices.

This marked the third straight month of acceleration and second consecutive month that the headline print fell within the central bank’s 2%-4% goal.

BSP Governor Eli M. Remolona, Jr. earlier said that inflation could push past 4% if oil prices hit $100 a barrel, which may force the Monetary Board to reverse its policy path and raise the key rate. 

The central bank delivered its sixth straight 25-basis-point (bp) cut at its first policy review of the year, bringing the benchmark interest down to 4.25%. It has so far reduced borrowing costs by 225 bps since August 2024.

For Moody’s, significant inflationary pressures might push the BSP to hike rates, noting that it was one of the first central banks to tighten amid price shocks from the Russian invasion of Ukraine in 2022.

“If… the broad import prices were to be much more inflationary based on whatever the data at that point, we do expect, you know, there could be some reversal in the policy direction,” Mr. Kim said.

Meanwhile, Moody’s also kept its Philippine growth forecast for this year at 5.5% as it sees BSP’s recent easing providing some boost.

“I think at this current point, our (growth) expectation is around 5.5% for 2026,” Chong Jun Wong, assistant vice-president and analyst for financial institutions at Moody’s Ratings, said. “And at the same time, the reduction in interest rates over the past, let’s say, two years will also support the repayment capacity of borrowers.”

If realized, gross domestic product growth would be faster than the pre-pandemic low of 4.4% last year and will be within the government’s 5%-6% target for 2026.