Moody's Investors upgrade Philippine credit rating to Ba1; Gross Reserves at $81.90 -Billion USD level

The Philippines' debt rating was raised to the highest level since the start of 2004 by Moody's Investors Service, bringing the Southeast Asian nation one step away from investment grade. The peso and bonds rose.

The new credit rating upgrade for the Philippines to a notch below investment grade, aligning its assessment of the country's debt quality with those of Fitch Ratings and Standard & Poor's Ratings Services for the first time since April 2003, that brings the Philippines on par with Turkey and Hungary. The ratings outlook is stable.

"The writing is clearly on the wall," said Roberto Juanchito Dispo, president of First Metro Investment Corp., one of the arrangers of the government's record retail bond sale this month. "The Philippines is definitely on its way to becoming investment grade in due course. This will bring numerous tangible economic benefits to the country."

Philippine officials welcomed Moody's action, which came 16 months after Fitch and four months after S&P lifted their ratings to just one step below investment grade. Fitch and S&P have stable outlooks on their assessments.

President Benigno Aquino has won ratings upgrades as he takes steps to contain the budget deficit and lure foreign investors to spur expansion in the $225 billion economy. Standard & Poor's in July raised the debt rating to BB+, one level below investment grade, citing improved prospects for growth, while an agreement with Muslim rebels this month to end a four-decade insurgency in the mineral-rich south has boosted the country's appeal.

Since S&P, Moody's and Fitch started rating the Philippines in 1993, 1995 and 1999, respectively, the country hasn't moved out of junk level. Earlier this month, S&P said that historically it takes around 2½ years before a BB+ rated country cracks investment grade, which for the Philippines could mean late in 2014 or early 2015.

Jeffrey Ng, an economist with Standard Chartered Bank, said that the Philippines could win an investment-grade rating if it pursues further fiscal reforms, including passing pending tax measures in Congress.

"We have been calling for investment grade around 2014. The country's strengths are in its economic fundamentals and stable political environment; the government is still working on investment and fiscal consolidation," he said.

Aninda Mitra, an economist with ANZ, said a demonstrable record of sustained economic growth, especially if it is investment-driven, would help the Philippines graduate from the junk-level rating.

"Moreover, the passage of the sin tax bill, which broadens the fiscal base for heightened spending on infrastructure and health, would also set the structural basis for further upgrades to the investment-grade space," Mr. Mitra said.

The Senate is now reviewing its version of the so-called sin tax bill—a measure that would increase excise taxes on cigarettes, liquor and beer—that as currently proposed will generate additional revenue of around 15 billion Philippine pesos ($363 million), just a quarter of what the government was seeking and half that of the revenue expected from the version of the House of Representatives.

Peso Gains

The peso erased losses, gaining 0.1 percent to 41.177 per dollar as of 2:06 p.m. in Manila, according to data from Tullett Prebon Plc. It is the top gainer this year among the 11 most- widely traded Asian currencies tracked by Bloomberg. Philippine dollar-denominated bonds maturing in January 2037 rose after the upgrade, halting a four-day slide. The yield on 5 percent bonds fell one basis point, or 0.01 percentage point, to 3.78 percent, according to data compiled by Bloomberg.

"Improved economic performance and continued fiscal revenue buoyancy in the face of deteriorating global demand" led to the upgrade, Moody's said in a statement. "In contrast to similarly rated countries, the country is poised to record a combination of faster growth, lower inflation, exchange rate appreciation, and an increase in foreign exchange reserves, while maintaining trend debt consolidation," it said.

Aquino is taking steps to reduce corruption while seeking more than $16 billion of investments in roads and airports to spur expansion to as much as 7 percent in 2013 to create jobs and reduce poverty. Gross domestic product rose 5.9 percent in the second quarter from 6.3 percent in the previous three months, which was the fastest expansion in Southeast Asia.

"This is another affirmation of the economic agenda of President Aquino," Finance Secretary Cesar Purisima said in a mobile text message today. "Good governance indeed is good economics. We will continue to focus on the fundamentals of fiscal sustainability and business environment enhancement."

Beneficial Effects

Bangko Sentral ng Pilipinas last week cut its overnight borrowing rate by 0.25 percentage point to a record 3.5 percent, bringing the total reduction in 2012 to 1 point. An investment- grade rating is possible next year, Governor Amando Tetangco told reporters today.

"Over the longer term, the landmark peace agreement signed between the government and the Moro Islamic Liberation Front may have wider beneficial effects on investment and economic growth in Mindanao -- the country's largest island -- which has untapped agricultural and mining potential," Moody's said.

The central bank lowered its inflation forecast for this year to 3.3 percent from 3.4 percent, and to 3.9 percent from 4.1 percent next year. Inflation unexpectedly eased in September to 3.6 percent from a year earlier.

Today's upgrade contrasts with recent actions on other Asian nations. Vietnam's government bond rating was cut last month by Moody's for the first time since 2010 as the nation grapples with rising bad debt in its banking system that has hurt growth, while S&P said this month India may lose its investment-grade rating within the next 24 months if growth slows and political opposition to policy overhauls increases.

"A stable outlook signals possible further upgrades in the future," central bank Deputy Governor Diwa Gunigundo said in a mobile text message. "The challenge for us is to sustain what we have been doing in strengthening the macro economy and enhancing good governance."

The local financial markets largely ignored Moody's rating upgrade, with the Philippine stock market's main performance barometer closing 0.1% lower, while the U.S. dollar was a tad higher against the peso.

Finance Secretary Cesar Purisima, who had consistently argued that credit rating companies are trailing capital markets in rating Philippine debt, said that Moody's action is a recognition of "the significant progress that the Aquino administration has undertaken to improve the country's economic fundamentals."

He said that with the government's commitment to macroeconomic stability, enhanced fiscal stability and investment growth, "investment grade will definitely come sooner rather than later."

Philippines foreign reserves reach historic $81.88-Billion level in Sept 2012

Philippine foreign exchange reserves reached a new record high of $81.88 billion as of end-September, Bangko Sentral ng Pilipinas reported Friday, saying its dollar-buying operations in the market could still boost international reserves during the rest of the year.

The gross international reserves level was equivalent to 6.5 times of Philippines foreign debts, and enough to pay for about a year of the country's import requirements, the Bangko Sentral noted.

In August, the country's foreign reserves totaled $80.73 billion, and were recorded at $75.17 billion as of end-September 2011.

In a statement, Bangko Sentral revealed its dollar-buying operations – to help rein in a stronger peso against the US dollar – boosted September's foreign reserves.

The central bank would stay in the foreign exchange market buying dollars, especially if the peso continues to bear the brunt of speculative money in the stock market, said Bangko Sentral Governor Amando Tetangco Jr.

"If the peso would continue to appreciate because of temporary investments or hot money, the BSP will participate in the market and try to minimize strong fluctuations," he said.

Bangko Sentral would have no problem letting the peso appreciate if the pressure comes from long-term foreign direct investments, Tetangco added.

Wall Street Journal, Bloomberg, GMA News