“It’s an early Easter for the market,” said a fund manager after Fitch Ratings raised the Philippine credit rating to investment grade on Wednesday, a move expected to boost investments and lift the country’s long-term growth potential.
The upgrade is the first for the country, prompting a euphoric President Benigno Aquino III to highlight the dramatic shift of a largely impoverished nation from the “perennial laggard of Asia” to an economy finally “taking off.”
Amid the news, the Philippine peso edged higher versus the dollar and local stocks extended modest early gains to more than 3 percent at one point, hitting a record high.
Fitch announced the upgrade, saying the Philippine economy is resilient and now experiencing a level of foreign currency inflows that is even more comfortable than those of many industrialized nations.
The inflow of foreign currency, underpinned by dollar remittances from expatriate Filipinos, has helped the country become a net external creditor, it said in a statement.
The country has also had stronger and less volatile growth than its peers over the last five years, and expects the value of its economy—as measured by the gross domestic product of GDP—to grow at an average of 5-5.5 percent in the coming years, Fitch pointed out.
Credit to anticorruption
Fitch—one of three major international debt watchers that include Standard & Poor’s and Moody’s Investor Service—credited the Aquino administration’s anticorruption program, which is believed to have improved sentiment of businesses in the country.
It also cited the previous administration’s role in improving the fiscal management, to wit: “Improvements in fiscal management begun under President Arroyo have made general government debt dynamics more resilient to shocks.”
The credit rating firm’s move came as a surprise catalyst that revitalized the bulls into scaling unprecedented heights before the long Lenten break.
The Philippine Stock Exchange index rallied by 182.35 points or 2.74 percent toward its best ever finish of 6,847.47 on Wednesday. A new intra-day peak was also hit at 6,873.89 close to the end of the session.
Floodgates of investment
This marked the 24th record finish for the index this year. The local stock market upswing, which is now on its fifth year, has added to the index a total of 1,034.74 or 17.8 percent at the end of the first quarter.
Astro del Castillo, managing director at investment management firm First Grade Finance, said the upgrade would open the floodgates of investment, both foreign direct investment and the more volatile kind known as “hot money.”
“The most conservative funds are really just waiting for this feather in our cap before plowing back money to our country,” he said.
The fund manager said “it seems that the Philippines is no longer carrying its cross.”
In a statement read by presidential spokesperson Edwin Lacierda, Mr. Aquino said:
“We are pleased to hear that this afternoon, the Fitch group announced that they upgraded the status of the Philippines from BB+ to BBB-.”
“It is one among many other positive developments that demonstrates the reclamation of our national pride: Truly, what was once known as the perennial laggard of Asia is taking off, and is accelerating towards its goal of an equitably progressive society,” said Mr. Aquino.
The President lost no time in enumerating the benefits to the Philippines of having an investment grade status in a world dominated by ailing economies and soaring national debts.
“This means much more than lower interest rates on our debt and more investors buying our securities. Greater access to low-cost funds gives us more fiscal space to sustain and further improve on social protection, defense, and economic stimulus, among others.
“More companies in the real economy can now consider us an investment destination. Investment grade for sovereign debt should also lead to lower borrowing costs for Philippine companies in the international markets, consequently allowing for higher valuations for their securities,” Mr. Aquino said.
‘Virtuous cycle of growth’
This, he said, would in turn enable industries to expand and generate more jobs for our countrymen.
All these would foster “a virtuous cycle of growth, empowerment and inclusiveness that will redound to the benefit of Filipinos across all sectors of society.”
“The upgrade represents the perception of lessening risk in our markets; it formalizes the investment grade level at which the Philippines has already been securing credit,” he said.
“This is an institutional affirmation of our good governance agenda: Sound fiscal management and integrity-based leadership has led to a resurgent economy in the face of uncertainties in the global arena. It serves to encourage even greater interest and investments in our country,” he added.
Fitch also assigned a “stable” outlook on the rating, which indicates that it is unlikely to change over the short term.
Why PH deserving
It cited several economic indicators that, according to it, make the Philippines deserving of an investment status.
One of these was the country’s strong GDP growth rate achieved despite global economic problems. Last year, when developed countries like the United States and those from the euro zone struggled with serious debt and financial problems, the Philippines registered one of the fastest growth rates not only in Asia but in the world.
“The Philippine economy has been resilient, expanding 6.6 percent in 2012 amid a weak global economic backdrop. Strong domestic demand drove this outturn,” Fitch said.
The credit-rating agency noted that the favorable growth performance of the Philippines happened while prices of basic goods and services, as measured by the inflation rate, were kept relatively stable. Consumer prices increased by an annual rate of 3.2 percent last year, well within the 3-to 5-percent range that the government considers manageable.
While problems in developed countries weighed down on export revenues of many emerging market economies, the Philippines managed to offset the lower-than-target export earnings last year by registering a significant growth in household consumption and government spending, aided by private-sector investments.
Another encouraging indicator, according to Fitch, was the country’s ability to pay its debts to foreign creditors as determined by its level of US dollar reserves.
$84B in reserves
Aided largely by remittances and foreign investments in the business process outsourcing sector, which includes the call-center industry, the country’s dollar reserves held by the central bank have grown over the years and now stand at about $84 billion — enough to pay for the country’s import requirements for one year.
According to international benchmarks, a comfortable level of reserves is one that is enough to cover at least four months’ worth of import requirements.
The $84 billion also exceeds the country’s total outstanding foreign currency-denominated debts, which stand at about $60 billion, placing the Philippines in a “net-creditor” position against the rest of the world.
Fitch likewise recognized the ability of the Philippine government to significantly improve its fiscal condition over the years. After almost falling into a fiscal crisis in early 2000s, the country managed to reverse the trend by implementing measures that improved the government’s revenue collection and brought down the country’ debt burden to manageable levels.
From more than 70 percent of the country’s GDP in 2004, the government’s outstanding debt to local and foreign creditors is now equivalent to just about 50 percent of GDP.
Fitch also cited “prudent” debt-management strategies of the government that further improved its ability to pay obligations as they come due.
These include debt refinancing programs, under which the government exchanges maturing bonds for those with longer maturities. Another strategy is replacing dollar-denominated debt with those in pesos which reduces the risk associated with sudden foreign exchange fluctuations.
Fitch pointed out, however, that the Philippines should address several concerns about its economy to ensure it retains its investment grade.
Fitch said the country, which has a population of more than 90 million, had an average individual annual income of $2,600 in 2012, way below the average of $10,300 in countries that have comparable credit ratings.
The international credit-rating firm likewise cited the need for the Philippines to cut bureaucratic red tape that discourages investments.
While trading was mostly upbeat since the start of the shortened trading week due to quarter-end window-dressing, Fitch’s rating upgrade allowed the local financial markets to end with a big bang.
At 2:33 p.m. on Wednesday, Fitch announced the upgrade, triggering a new wave of buying at the stock market during the last hour of trade.
“This is the best news for us Filipinos and we are all part of this,” said Ismael Cruz, president of stock brokerage IGC Securities.
Jose Mari Lacson, head of research at local stock brokerage Campos Lanuza & Co. said the market’s performance on Wednesday turned very exciting with some fast buying of large-caps on the back of the investment upgrade news.
Local markets are closed in the next two days and will resume on Monday.
“Barring any major upheaval in the global markets or political scene over the long weekend, we expect Monday to be equally exciting or even be a bigger blast,” he said.