MANILA, Philippines – Moody’s Investors Service has raised its sovereign rating for the Philippines to Ba3 from B1 previously, noting the country’s high degree of resiliency against external shocks.
A Ba3 rating is three notches below investment grade while a B1 rating is four notches below investment grade. The outlook on the ratings is stable.
Moody’s said the country’s financial system and external payments position exhibited a high degree of resiliency in the face of the global financial and economic crisis. International reserves of the central bank are at a historical high and exceptional policy measures have not been required to shield the banking system from global shocks, it said.
“At the same time, Moody’s notes that pressures have risen on the budget and are more severe than had been originally expected this year by the government but, at the same time, the larger fiscal deficit should be finance-able from domestic and foreign funding sources,” said Thomas Byrne, Moody’s senior vice president.
Moody’s said that while the Philippines has a larger budget deficit, this is mainly the result of a collapse in economic activity, a pattern that is evident in other regional and global economies.
The government’s budget deficit swelled to P30.2 billion in June compared to the P800 million surplus recorded in the same month last year. The January to June budget gap swelled to P153.4 billion or more than eight times the P18 billion-deficit recorded in the same period last year.
Moody’s also noted that the Philippines has maximized the reopening of global credit markets.
Last July 18, the government successfully sold $750 million in global bonds to foreign investors to finance a larger deficit.
“The re-opening of global credit markets this year has also been opportunistically exploited by the Philippines in its effort to minimize both a crowding-out of the domestic markets and a rise in government bond yields,” said Byrne.
Moody’s expects that economic growth will be restored gradually and, along with that, some pick-up in the government’s fiscal revenue performance will help contain the abnormally large deficit.
The economy grew by a measly 0.4 percent in the first quarter of the year from 3.9 percent recorded in the same period last year. Officials expect the economy to have improved in the second quarter of the year.
Moody’s said the government should continue to shore up revenues, both through tightened administration and the introduction of new tax measures, several of which are pending before Congress.
“In addition, while expenditure control has improved in recent years and Treasury debt management has been skilful, these measures alone will not ensure fiscal sustainability,” he said.
Moody’s also considers that a stable peso is crucial for containing budgetary debt service payments — about half of public-sector debt is denominated in foreign currencies — and so allow for budgetary resources to be channeled into infrastructure programs and fiscal stimulus measures. The absence of volatility in the peso reflects the resiliency of the balance-of-payments to the global crisis.
Byrne said that for the Philippines’ rating to move upwards, the government should be able to balance the budget by 2013.
“For the Philippines’ rating to move upwards, Moody’s will assess prospects for the continued resiliency of the country’s balance of payments, the health of the financial system, and progress towards the achievement of the new, fiscal consolidation goal by 2013. All these will likely require policy prudence and additional fiscal reform. Moreover, continued improvement in the investment environment will be required to place the economy on a path of strong, sustainable growth,” he said.
On the other hand, downward pressure on the rating would arise from an inability to improve government finances as the global economy recovers or from a structural weakening in the balance of payments.
Government officials welcomed the upgrade, saying that it is a recognition of the resiliency of the Philippine economy.
“The BSP shall do its part in maintaining the soundness of our country’s financial system with better prudent financial governance, while keeping its mandate in promoting price stability conducive to balanced and sustainable economic activity,” BSP Governor Amando Tetangco Jr. said.
Finance Secretary Margarito Teves said: “The credit rating upgrade clearly shows confidence in the resiliency of the Philippine economy which was earned through the formulation and implementation of economic and fiscal reforms early on.”
The last rating action on the Philippines by Moody’s was in February when it affirmed the positive outlook on the government of the Philippines’ B1 rating. –Iris C. Gonzales, Philippine Star
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