Moodys upgrade credit rating of the Philippines 1 notch up -economy resilient

MOODY'S INVESTORS SERVICE has raised the Philippines' credit rating outlook to positive from stable as the government continues to reduce the fiscal deficit and public debt.

The move sets the stage for a possible upgrade of the Philippines' Ba2 credit rating -- two notches below investment grade -- in the next 12 to 18 months, Moody's Assistant Vice-President Christian de Guzman yesterday said in an e-mail.

The debt watcher is slated to visit the country in June as part of its "regularly scheduled surveillance activities," he added.

Finance Secretary Cesar V. Purisima, in a statement, said: "This is one more step in our march towards investment grade, towards reducing the gap between the market rating and the credit rating, and more importantly towards a more sustainable growth path".

The Aquino administration aims to secure its first-ever investment grade credit rating by 2016 in order to lower its borrowing costs and attract more foreign investors.

According to Moody's, among the key drivers behind the positive outlook were the government's "faster-than-expected" fiscal consolidation and active debt management.

"The government of the Philippines has continued to demonstrate prudence in its fiscal management, as characterized by low budget deficits relative to its rating peers and a steadily declining level of debt relative to GDP (gross domestic product)," it said in a report released yesterday.

The government trimmed its deficit to ₱2.885 billion as of April, just 1% of its P279.1-billion cap for this year. It was also kept at P197.754 billion in 2011, two-thirds of the ₱300-billion ceiling.

Moreover, national government debt fell to only 50.9% of the GDP last year, surpassing the target of 51.7% and the 52.4% posted in 2010.

"Such outcomes are the result of expenditure restraint and improved revenue performance," Moody's noted.

Revenue collections, in particular, have grown faster than the GDP in the past five quarters, solely due to tax administration measures, it added.

"We expect revenue growth to improve further upon the passage of legislation aimed at restructuring excise taxes on alcohol and tobacco products."

Moreover, the Philippines has successfully improved its public debt by lowering borrowing costs, lengthening maturities and reducing foreign currency exposure, Moody's said.

The government successfully concluded a $1.5-billion offer of 25-year global bonds in January, securing interest rates of only 5% -- the lowest ever achieved by an Asian sovereign for bonds with a tenor greater than ten years.

It also repurchased $1.3 billion in high-coupon, foreign-currency bonds last October, cutting borrowing costs by settling the debt papers before their maturity.

Other than an improvement in national finances, Moody's also cited the Bangko Sentral ng Pilipinas (BSP) for its "solid track record of inflation management."

"The sovereign's vulnerability to global financial market shocks has been reduced by the build-up of foreign exchange reserves, resulting in turn from robust current account surpluses and healthy capital inflows in recent years," it added.

The outlook on the BSP's Ba2 credit rating was likewise raised to positive from stable yesterday.

While concerns still remain over the Philippines' large debt stock, it is mitigated by institutional features such as automatic appropriations in the budget for debt servicing, Moody's said.

"In addition, an increasingly large bond sinking fund provides an adequate buffer that guards against near-term liquidity pressures," the credit rater explained.

And as the global economic environment remains uncertain, the Philippine economy is stabilized by remittance inflows which support the balance of payments and spur domestic household consumption, Moody's said.

Overseas Filipino workers remitted a total of $4.842 billion in the first quarter, posting a 5.4% growth year on year against the central bank's 5% projection.

In order to secure a credit rating upgrade, Moody's urged the government to continue the reduction of public debt and pursue reforms to increase revenues. It must also accelerate public spending in areas of the economy that would spur growth.

"These developments should also be accompanied by the continued health of the country's balance of payments and stability of the financial system," it said.

The Philippines, meanwhile, must be wary of macroeconomic instability which could trigger inflation. "A shift away from the focus on good governance" would also be detrimental.

For their part, economic managers hailed the impact of the Aquino administration's campaign of good governance.

"The message we have been trying to send ... is that fiscal performance can improve with good governance," central bank Governor Amando M. Tetangco, Jr. said.

"This positive rating action is therefore welcome and is a sign that Moody's is seeing the fruits of good governance on all fronts: fiscal, monetary and external."

Mr. Purisima added: "The Aquino administration will continue to focus on good governance as the basis for good economics, on fiscal sustainability, on macroeconomic stability and on opening up the country to business and tourism."