Moody's raises 3rd time Philippines' credit ratings

The Philippines received its third rating upgrade well within the first year of the Aquino administration after New York-based Moodys Investors Service raised the country’s credit rating, with a stable outlook amid the gains made in fiscal consolidation, sustained macroeconomic stability and robust external payment position.

The Aquino administration welcomed the upgrade by Moody’s saying that the improvement in the country’s debt rating had a lot to do with progress made in fiscal consolidation.

Moody’s raised the Philippines’ foreign and local currency long-term bond ratings to Ba2 from Ba3 with a stable outlook. Ba2 is classified as non-investment grade speculative debt and still two notches below investment grade.

The government said the upgrade, which it described as long overdue, affirms its economic agenda, particularly efforts to trim the budget deficit.

“This is an affirmation of the economic agenda and leadership of President Aquino, particularly our fiscal sustainability program,” Finance Secretary Cesar Purisima said.

The Finance chief said that with the Ba2 rating, the country is now a step closer to achieving an investment grade from global debt watchers.

“We are now one step closer to our goal of attaining investment grade rating which is crucial in further lowering our borrowing costs and attracting more foreign direct investments,” he said.

Moody’s assistant vice president Christian De Guzman and senior vice president Thomas Byrne said the “key drivers” to the upgrade include the progress made in fiscal consolidation by the Aquino administration as well as the sustained nature of macroeconomic stability coupled with continued strength in the country’s external payments position against a background of a significant pick-up in the momentum for economic growth.

This is the third rating upgrade received by the Philippines under the leadership of President Aquino who assumed office June 30 of last year.

Moody’s upgraded the country’s credit rating outlook to positive from stable last January while New York-based Standard and Poor’s (S&P) raised the credit rating of the Philippines to two notches below investment grade from three notches last November 12 on the back of the country’s rising external liquidity.

With the upgrade, international credit raters Moody’s, S&P, and London-based Fitch Ratings now rate the country’s sovereign credit at two notches below investment grade with a stable outlook.

Likewise, the country’s long-term foreign currency bond ceiling was also raised to Baa3 from Ba1 while the long-term foreign currency deposit ceiling was upgraded to Ba2 from Ba3. The short-term foreign currency bond ceiling was raised to P-3 while the short-term foreign currency deposit ceiling remains at Not Prime.

In a related rating action, Moody’s also upgraded the rating of the Bangko Sentral ng Pilipinas (BSP) to Ba2 from Ba3 with stable outlook.

Fiscal authorities have committed to trim the budget deficit to two percent of gross domestic product (GDP) starting 2013 until the end of the term of President Aquino in 2016.

The Philippines intended to reduce the deficit to about P290 billion or 3.2 percent of GDP this year from a record level of P314.4 billion or 3.7 percent of GDP last year. The country posted a surplus of P61 million in the first four months of the year, a complete reversal of the P131.8 billion deficit booked in the same period last year.

“Over the first four months of 2011, the national government recorded a small fiscal surplus, building upon the notable turnaround in fiscal management seen during second half of 2010. Much of the improvement has been attributed to expenditure restraint, but there is also evidence of an uptick in revenue generation,” Moody’s explained.

Data showed government revenues surged 18.22 percent to P461.4 billion from January to April compared to P390.21 billion in the same period last year on the back of improved collections by the Bureau of Internal Revenue (BIR) and the Bureau of Customs (BOC) while expenditures fell 11.6 percent to P461.35 billion from P521.87 billion as interest payments plunged reflecting the continued success of the Bangko Sentral ng Pilipinas (BSP) in anchoring inflation expectations and consequently debt-servicing costs.


“While we expect expenditures to increase significantly in the second half of 2011, as the government commences its cornerstone infrastructure investment program, the rise will not likely derail the trend towards fiscal consolidation. By demonstrating firm fiscal restraint, the government has bolstered its policy credibility and has improved prospects for reform,” Moody’s added.

The rating agency, however, cited the continued uncertainty over the implementation of structural measures to improve revenue generation as well as the government’s budgetary interest burden and its debt overhang that remain high when compared with its rating peers.

“Moody’s further notes that owing to continued prudence in macroeconomic management, solid growth momentum in the Philippines has not produced substantial overheating pressures — either through inflation or a large deterioration in the current account,” the rating agency added.

Moody’s also said the country’s external payments position is strong in relation to its rating peer as growing foreign exchange reserves continue to mitigate vulnerabilities related to a possible sudden stop of capital inflows.

BSP Governor Amando Tetangco Jr. said that the rating action of Moody’s confirmed that the macroeconomic policy setting of the Philippines are consistent with stronger sovereign credit fundamentals.

“They specifically mention that the Republic benefits from the absence of economic overheating and inflation pressures, which has been due largely to the adoption of an appropriate policy mix. The monetary policy stance which has contained inflation, while remaining supportive of economic growth, and the appropriate management of the country’s external position have helped to secure macroeconomic stability,” he said.

The BSP chief said monetary authorities would continue to pursue prudent monetary and banking policies and reforms to ensure the economy remains on the path towards sustained growth

For his part, BSP Deputy Governor Diwa Guinigundo said the Philippines has long deserved the credit rating upgrade and that the financial markets have discounted the eventuality.

“The upgrade is well deserved. In the last ten years, we have grown quite impressively even through the crisis, inflation has been muted, the BOP has been in surplus, the GIR has climbed many folds, the banks have been strong and stable, fiscal consolidation has been entrenched,” Guinigundo added.

Upgrade recognizes reforms

Budget Secretary Florencio Abad, for his part, said the upgrade recognizes the reforms initiated by the government.

“This inspires and energizes us to go deeper in pursuing reform and in ensuring focused and efficient use of public funds,” Abad said.

The upgrade by Moody’s upgrade is the second “in less than a year of the Aquino administration,” Purisima noted.

In November last year, Standard &Poor’s also gave the Philippines a one-notch upgrade to “BB stable.

“This is a reminder to investors that our message is clear - the Philippines is an investment destination with exceptionally promising growth opportunities,” Purisima said.

“We are now one step closer to our goal of attaining investment grade rating, which is crucial in further lowering our borrowing costs and attracting more FDIs (foreign direct investments),” Purisima added.

Economists agreed that the upgrade was well expected given fiscal improvements seen since the Aquino administration took office. But they noted a lot more needs to be done for the Philippines to reach investment grade.

Moody’s upgrade brings its rating in line with those of Fitch and Standard & Poor’s.

“To reach investment grade, the Philippines... still has to improve bureaucracy, corruption and other economic issues like tax ratio to make their state revenue sustainable. They need to improve infrastructure and tame inflation,” said Juniman of Bank International Indonesia.

“The upgrade was well anticipated and comes on the heels of the fiscal improvements we’ve seen,” noted Euben Paracuelles of Nomura, Singapore. “The next crucial step, apart from maintaining the intensity of tax administration measures, is to pass tax policy changes to boost revenues. This is more challenging but our view is that we are relatively optimistic the government will be able to maintain its focus.”


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