S&P seen to follow investment upgrade

BSP scrambles to contain expected surge in liquidity

American banking giant Citigroup expects Standard & Poor’s to affirm Fitch’s recent Philippine sovereign investment upgrade by likewise raising the country’s credit bar.

“We believe S&P may also upgrade soon. We believe two out of three ratings upgrade will represent a strong argument to investors that the country deserves an IG (investment grade) rating,” Trinidad said.

S&P currently rates the Philippine government at a notch below investment grade, but it was the first to hint of an upgrade when it issued a “positive” outlook on its rating.

But the flipside to the rating upgrade is the strong likelihood of a surge in portfolio inflows that may aggravate the risks the country now faces by having too much liquidity, Citi economist Jun Trinidad said in a recent research note.

“This may be the reason why the BSP [Bangko Sentral ng Pilipinas] has been moving urgently to put in place a monetary policy framework and correct existing policy settings that hopefully can address … [the] excess liquidity risk that may come with the upgrade,” Trinidad said.

Apart from the liquidity risks, the BSP will need to do something about the pressures on its balance sheet brought on by the pileup in its special deposit accounts, which now amounts to nearly P2 trillion, the economist said.

The special deposit account is a facility where banks can park their excess funds with the central bank.

As such, Trinidad said, the sovereign upgrade may compel the BSP to ease the SDA rate to 1 or 2 percent. The SDA rate has already been slashed by a total of 100 basis points this year, and now stands at 2.5 percent.

Future BSP actions on the SDA may “bode well for the local bond market, although admittedly, the long end has rallied furiously in recent sessions due to previous SDA cuts, strong liquidity and the fiscal story,” Trinidad said.

Fitch’s surprise move to raise the country’s credit to investment grade supports the strong rallies of local financial markets since late last year, when the anticipation of a rating upgrade in 2013 ran high, Trinidad said.

The rating upgrade also removes a key investment obstacle for some offshore funds that may be mandated to invest only in investment grade paper, he added.

“On the real economy side, an investment grade should make it easier to ‘market’ the economy to real investors. Attracting private proponents, including private funding to PPP [public-private partnership] and other infrastructure projects would not constitute a major obstacle with the investment grade,” Trinidad said.

The cost of investing in the country, including investment insurance coverage, may ease with the higher ratings. The investment grade rating can thus provide “additional spark” to investment-driven growth other than fast-tracking the government’s PPP, he explained.

On Monday, Fitch Ratings also upgraded the credit standing of the country’s biggest banks.

In a statement, Fitch said it raised by a notch the Long-Term Foreign-Currency Issuer Default Rating (LTFC IDR) of Bank of the Philippine Island and Banco de Oro.

The two banks now boast of a minimum investment grade of BBB-.

Fitch also raised by a notch the Long-term Local-Currency IDR (LTLC IDR) and Viability Rating (VR) of Banco de Oro to BB+, or a notch below investment grade.

The ratings agency said it raised the support rating (SR) of the following banks following the improved credit standing of the government: China Banking Corp., Rizal Commercial Banking Corp., Security Bank Corp., and Union Bank of the Philippines.

SR dictates the amount of support a bank may get from the government in the event of liquidity crunch.

Meanwhile, long-term local and foreign currency ratings indicate the ability of a bank to meet its obligations to local and foreign investors, respectively. Viability rating indicates an entity’s overall capability to withstand financial stress.

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