INVESTMENT GRADE

S&P gives PH second credit ratings upgrade

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MANILA, Philippines—The Philippines is on a roll.

After being given bullish growth prognoses from various institutions and getting its first investment grade from Fitch Ratings, the Philippines was lifted out of the junk bond status by another international credit-rating agency on Thursday.

Standard & Poor’s on Thursday said in a statement that it had raised the country’s credit rating by a notch from BB+ to BBB- —the minimum investment grade—citing the country’s rosy macroeconomic fundamentals amid global economic problems.

S&P assigned a “stable” outlook on the country’s new rating, which means the rating will likely be unchanged over the short term barring unexpected developments that could change the country’s macroeconomic indicators.

The upgrade was cheered by Finance Secretary Cesar Purisima—the head of the administration’s economic team—who noted that S&P’s move marked the 13th positive rating action since the Aquino administration assumed office in mid-2010.

Purisima hailed it as “another resounding vote of confidence in the Philippines” and an affirmation that the local economy’s soundness was at par with countries rated investment grade or higher.

“We are very pleased that S&P, along with Fitch [Ratings], has also affirmed the Philippines’ strong economic and fiscal gains—progress that has been made thanks to the discipline and prudence in financial management instilled by President Aquino in his administration,” Purisima said.

Bangko Sentral Governor Amando Tetangco Jr. said the investment ratings from Fitch and S&P were expected to further lift investor sentiment on the Philippines. He said the favorable sentiment would translate into actual investments over the short to medium term, and would help to make the Philippines catch up with its Southeast Asian neighbors in terms of foreign direct investments.

“With our investment grade rating, we are more confident that these inflows, particularly of more FDIs [foreign direct investments], will swing toward increasing the country’s productive capacity, thereby generating more employment and higher incomes,” Tetangco said.

A credit rating is used mainly by foreign creditors when deciding to lend money to the government or private corporations. More broadly, however, an investment grade signals to the investors that a country is a place suitable for business, and that its government and private enterprises have a good ability to pay their obligations, resulting in lower borrowing costs.

“The upgrade on the Philippines reflects a strengthening external profile, moderating inflation, and the government’s declining reliance on foreign currency debt,” S&P credit analyst Agost Benard said in the statement.

Thursday’s upgrade leaves Moody’s Investor Service as the only one among the three major agencies that has not relieved Philippine government-issued international debt paper of their junk bond status.

‘Most underrated’

But Purisima said that based on actual borrowing sorties in the past two years, creditors were rating Philippine bonds at least two notches above investment grade.

“Based on Moody’s own bond implied ratings, we are among the most underrated countries by Moody’s,” he said. “I am confident it will catch up soon.”

Purisima added that with this latest development, the government must redouble efforts to remove the remaining constraints to economic growth “if we are to reach even greater heights.”

He was referring to efforts related to improving the country’s infrastructure, and further improving revenue collections and opening up the economy to international trade and investments.

The improvement in the credit rating and growth estimate for the Philippines comes as global economic problems, led by the eurozone crisis, dampened outlooks on many countries.

The S&P upgrade on the Philippines also came with its announcement that it had lowered its outlook on the BB+ rating of Indonesia—Asean’s largest economy—from “positive” to “stable” amid the drag caused by unfavorable external environment. A rating of BB+ is a notch below investment grade.

 

84B dollar reserves

S&P said the Philippine ability to pay its debts to foreign creditors had strengthened, as evidenced by the country’s dollar reserves. These reserves, which currently stand at about $84 billion, are driven largely by remittances from expatriate Filipinos, foreign investments in the business process outsourcing sector and foreign investments in peso-denominated securities.

The credit rating firm likewise noted the Philippine government’s declining debt burden, which it attributed to a nearly decade-long effort to improve tax collection, combined with the growth of the economy.

After hitting a peak of 74 percent in 2004, the ratio of the government’s outstanding debt to the country’s gross domestic product (GDP) had declined steadily to about 50 percent by the end of 2012 and is projected by S&P to fall further to 47 percent by the end of this year.

“The current and previous administrations improved fiscal flexibility through restraining expenditures, reducing the share of foreign currency debt, deepening domestic capital markets and more recently through modest revenue gains,” S&P said.

 

Major weakness

The credit rating agency, nonetheless, cited a major weakness of the Philippine economy—the low per-capita income—which it said the government should focus on addressing.

S&P estimated that the country’s per capita income (the total value of the economy’s output divided by the population) would settle at $2,850 this year, a level lower than those of most countries with the same credit rating.

“The Philippine economy’s low income level remains a key rating constraint. The concentrated nature of the economy, infrastructure shortfalls and restrictions on foreign ownership, which deter foreign investment, are factors that hamper growth,” S&P said.

S&P said the country needed to generate more investments in order to provide jobs to people in the low-income segment and lift the per capita income.

Liberalize regulations

To generate investments, the country must liberalize its regulatory environment in a manner that allows easier entry of foreign investors, according to S&P. It also said the country must invest more in infrastructure, which businesses need for easier transportation of goods.

The credit rating firm, nonetheless, said there was a good chance that the Philippines would be able to increase per capita income over the medium to long term, especially if the country addresses infrastructure and regulatory problems.

“Real GDP per capita growth averaged 3.3 percent over the past decade—somewhat slow at this stage in the country’s development. Based on ongoing structural changes in the economy, rising private sector investment and with increased fiscal space allowing greater public spending, we expect real GDP per capita growth to rise to 4.5 percent in the forecast period to 2016,” it said.

Originally posted: 7:25 pm | Thursday, May 2nd, 2013

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