Philippines on track to better sovereign credit ratings

The Philippines is on the right track toward better sovereign credit ratings but an investment grade may not be in the cards this 2012 pending further progress in its fiscal and debt metrics, New York-based think tank Global Source said.

In its quarterly economic report titled “Dragon, or Drag-on?” dated February 11, Global Source said that from a slow 3.7-percent expansion last year, it expected the Philippines’ gross domestic product (GDP) growth to improve moderately to about 4.5 percent this year. It warned, however, that an expansion that relied on continued remittance flows and some recovery in exports would “unavoidably be fragile” given intensifying risks elsewhere in the world.

“The steadier engine this year should instead be public spending as government seems fully committed to reversing the underspending that had occurred last year when it stepped up its anti-corruption drive,” said the research, which was written by Filipino economists Romeo Bernardo and Margarita Gonzales.

On the economic managers’ campaign for investment-grade status, Global Source said there were indeed positive developments eventually leading toward this goal, particularly Standard & Poor’s change in outlook from “stable” to “positive” on its “BB” rating and the recent successful borrowing of the Philippine government from the long-term debt market at just 5 percent, which was better than the rate fetched by newly investment-graded Indonesia.

“We believe a change in credit ratings is likely within the year, though not yet to a lower medium-grade rating,” the report said.

Lower medium grade refers to at least BBB- or Baa3, the lowest among investment-grade ratings in the rating scale of global credit watchers Moody’s, S&P and Fitch.

“In any case, traders typically note that Philippine sovereigns have already been trading at investment-grade levels, making a credit upgrade or change in outlook basically a catch-up move,” the research said.

Only Fitch rates Philippine issues at one notch below investment grade (BB+) while S&P and Moody’s are at two notches below investment grade.

While rating agencies recognize the country’s high external liquidity and relatively steady growth, Global Source said these debt watchers claim to be still looking for improvements in the Philippine sovereign fiscal and debt profile, specifically in terms of a steeper downward tilt of the debt trajectory.

“In our own computation, without a pronounced increase in sustainable revenue sources, the near-term reduction in the public debt-to-GDP ratio will not be enough for the country to attain levels approaching those of similarly rated peers,” the report said.

The research noted that the tax effort in the country has recently been whittled down by the implementation of several revenue-eroding laws. “Unfortunately, with Congress currently very much preoccupied with the impeachment trial of the Supreme Court chief justice, we are not too optimistic, at least in the near term, that progress will be made toward passing much-needed revenue-generating legislation,” it explained. The research was referring to the proposed reform of tobacco and alcohol taxes and fiscal incentives rationalization—measures seen helping bring back the debt ratio even to recent pre-crisis levels.