Moody’s hikes credit rating outlook to ‘positive’
By Doris Dumlao
Philippine Daily Inquirer
First Posted 02:13:00 01/26/2008
MANILA, Philippines -- International credit rating group Moody’s Investors Service on Friday raised its rating outlook for the Philippines to “positive” from “stable,” citing the government’s headway in stabilizing its budget position and in reducing its reliance on foreign financing.
A “positive” outlook means there is possibility for a credit rating upgrade in the short term. A “stable” outlook means no change is anticipated. A higher rating lowers the benchmark cost of borrowings for Philippine public and private companies and thus boosts financial market sentiment.
Moody’s senior vice president Tom Byrne said Friday that smaller budget deficits and the country’s improved international payments position had allowed the government to prepay the public sector’s foreign debt and to shift budgetary financing to depend less on foreign funding.
“Improved macroeconomic conditions and fiscal performance are mutually reinforcing each other,” Byrne said in a statement.
Malacańang was elated by Moody’s decision.
“It’s very welcome news and rating [outlook] upgrade not just for the Palace but for the rest of the Filipino people. This has proven that good economic governance is the best politics,” said Presidential Management Staff chief Cerge Remonde.
Deputy Presidential Spokesperson Anthony Golez said Moody’s upgrade showed that the economic policies and programs of President Gloria Macapagal-Arroyo’s administration “are now bearing fruit.”
“The country is now experiencing sustained economic growth and these ratings are a reiteration that the Philippines is the best value in Asia,” said Golez.
Byrne noted that a stronger Philippine peso and lower domestic interest rates had significantly lowered debt service payments, “freeing budgetary resources for much-needed infrastructure spending, which is helping to resuscitate the long-languishing levels of investment in the country’s economy.”
Moody’s will decide in about a year whether to raise the Philippines’ credit rating, which at present is four notches below investment grade.
“If developments continue along a favorable path, sometime in the next 12 months, give or take some months, a little before or a little after, we would decide to take the next step which is a rating review for an upgrade,” Byrne said, quoted by the news agency Reuters.
Continued progress needed
For the government’s debt rating to move up, Byrne said, there must be a continued commitment to fiscal consolidation through a stronger revenue effort, expenditure restraint, or a combination of both.
He said continued progress in reform and restructuring of the power sector would also be necessary to keep public finances on firmer ground.
“Ultimately, debt ratios will need to be reduced from their current high levels and will need to move closer to levels consistent with ‘Ba’-rated countries,” he said.
The government’s debt was 58.9 percent of the of gross domestic product (GDP) as of October 1997, compared with the 47.0 percent average of countries rated a notch higher by Moody’s. Indonesia, for instance, has a debt-to-GDP ratio of 43 percent.
Finance Secretary Margarito Teves and Governor Amando Tetangco Jr. of the central bank also welcomed Moody’s favorable change in outlook.
Teves said Moody’s action was an acknowledgment of the country’s improving macroeconomic fundamentals and indicated recognition of the government’s efforts to raise more revenues to support social services and infrastructure development.
“However, we still have a lot of work to do in generating the resources to finance the requirements of a fast-growing economy,” Teves said in a statement.
He said the Philippine government was hopeful that this favorable outlook would be followed by positive ratings actions by other rating agencies.
Other rating groups
Moody’s currently gives the Philippine sovereign the lowest score among the ratings given by other major global credit watchdogs.
Moody’s rates the government debt at “B1,” four notches below investment grade, which determines the country’s interest costs when it seeks foreign funding.
Standard & Poor’s currently rates Philippine sovereigns at “BB minus,” three notches below investment grade. It gives the rating a “stable” outlook.
Fitch has a “BB” rating on Philippine sovereign debt, or two notches below investment grade, with a “stable” outlook.
Tetangco said: “We are confident that as we maintain stable macroeconomic fundamentals, inflation expectations will remain well-anchored to afford us to sustain a low interest rate environment as such could continue to lower the government’s debt service payments and propel investments to a higher level, particularly in much-needed infrastructure.”
The favorable outlook was also welcomed by economists and bankers.
“The outlook upgrade reflects confidence that Secretary Teves and his team will successfully preserve the impressive gains achieved in fiscal consolidation in a challenging 2010 [election]-driven domestic political and turbulent international financial environment,” said Romeo Bernardo, a former undersecretary of finance who serves as a Philippine adviser to New York-based think-tank GlobalSource.
Chinatrust (Philippines) Commercial Bank treasurer Roland Avante said the improved rating outlook would definitely boost the country’s debt management program further and enhance the country’s credit standing among investors.
“It puts the country one step away from a credit upgrade,” he said. “I guess this will now depend on the ability of fiscal managers to be able to sustain the gains that have been achieved over the past years.”
The ratings of Moody’s include long-term government foreign and local-currency ratings, foreign-currency bank deposit ceiling and foreign currency country ceiling.
Oil prices
Moody’s lauded the government commitment to a market-based pricing of oil products despite surging world oil prices.
“The government has not masked inflation by subsidizing retail petroleum prices, thereby avoiding contingent fiscal liabilities and adding pressure on the balance of payments by encouraging higher oil imports,” said Byrne.
Byrne said this policy would allow the country to avoid running into political problems down the road, if subsidies were to become too costly and needed to be rolled back.
“We believe the government will continue to face considerable challenges in sustaining progress in strengthening its fiscal position, and deficit reduction may not be as readily achievable as in the past several years,” said Byrne.
“Populist, political maneuvering in Congress may water down the tax effort, and spending pressures may increase well before the 2010 presidential election.”
Bills in Congress
Teves said the Arroyo administration needed to pursue the passage of some bills that seek to improve revenues collection.
These bills include rationalization in the grant of financial incentives for investments, and simplification of the income tax system.
Teves said the Department of Finance was hoping that Congress would craft a bill to overhaul the system of taxing cigarettes and alcoholic beverages.
“We remain committed not only to pursue the implementation of our action plans but also to work closely with Congress on revenue enhancement measures this year in order to help ensure sustainability of the country’s strong economic performance,” he said.
In the proposed rationalization of incentives, the Department of Finance wants the government to remove tax- and duty-free privileges that are deemed redundant in that the recipients would have invested even without them.
On the income tax system, the department wants a uniform rate of allowable deductions for self-employed individuals.
It also wants a single tax rate for cigarettes and another for alcoholic products. With reports from Michael Lim Ubac, Michelle V. Remo, Agence France-Presse, and Reuters; edied by INQUIRER.net
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