S&P doubts credit rating upgrade for PH by 2013

Global credit watcher Standard & Poor’s Ratings Services said it usually takes two and a half years for a sovereign credit rating to move one notch to investment grade, dimming hopes that the Philippines may get an upgrade as soon as 2013.

But in a list of frequently asked questions sent out on Wednesday, S&P said the upgrade could come sooner or later and that underlying factors could result in stagnation and even reversal.

Market watchers are currently focused on an apparent race between the Philippines and Indonesia—both rated BB+—toward the coveted rating, which starts at BBB-.

“There can be large diversions from the average of 2.5 years,” S&P said. “For example, it took two years for Azerbaijan, South Africa, and Mexico to reach investment grade, compared with 10 months for Brazil and 11 months for Bulgaria.”

It was pointed out that the rating on the Philippines was unchanged for quite a while until two recent raises within a relatively short time.

S&P explained that improvements in the Philippines’ political environment and policy setting prompted such actions.

“Specifically, the government narrowed its fiscal deficits, lessened its reliance on foreign savings, and rationalized the public sector,” the agency said.

However, other factors that may influence further actions on the Philippines could unravel over a longer interval.

One is the inflow of remittances to the Philippines, which may be a negative factor in that it shows the economy’s failure to absorb labor supply.

“We account for this weakness in our appraisal of the country’s economy,” S&P said.

“That said, the Philippine overseas labor force is well diversified in terms of geography and skill sets,” it added. “In a country with an underdeveloped social safety net, their transfers support domestic consumption (and) to a lesser extent, they help investment in small enterprises and in residential construction.”

In terms of political and policy environment, S&P said the Philippines had relatively stabilized since the 2010 elections, with the legislature more efficient and the administration narrowing the deficit and spending more on infrastructure.

“In addition, our assessment of the (country’s) political settings takes into account institutional quality and stability, the regulatory and business environment, and data transparency and reliability, which evolve only over longer periods of time,” the agency said.

S&P cited the Philippines’ weak fiscal profile and the high interest burden on its public debt—due to a narrow revenue base and the large portion of expensive commercial debt—as among factors that hamper further improvement of its credit rating.

Also, S&P observed that the Philippines had made little inroads in improving family planning.

“Its relatively high population growth rate (averaging about 2 percent per year), also detracts from attaining higher per capita wealth levels,” the agency said.

“In the Philippines, more timely data on nonresident holdings of local currency debt would be helpful,” it added.