Ratings upgrade from S&P

STANDARD & POOR’S (S&P) has raised the Philippines’ credit rating to one notch below investment grade, citing the country’s prudent fiscal management, strong external position and stable economic growth.

The country has been upgraded to BB+ from the BB assigned in November 2010, the debt watcher yesterday said. In line with this, the credit ratings of the Bangko Sentral ng Pilipinas and the Development Bank of the Philippines were likewise raised to BB+ from BB.

All ratings were given a stable outlook.

“The upgrade reflects our assessment of gradually easing fiscal vulnerability,” S&P credit analyst Agost Benard said in the statement, “as the government’s fiscal consolidation improves its debt profile and lowers its interest burden.”

The budget deficit stood at P22.786 billion in May, well below the first semester ceiling of P109.341 billion. The full-year shortfall has been capped at P279.1 billion, equivalent to 2.6% of gross domestic product (GDP).

The country’s strong external position, driven by remittances from overseas Filipino workers and an export expansion, also supported the upgrade.

“We project ongoing current account surpluses of about 2% of GDP, based on remittance inflows from a large and well-diversified expatriate labor force, and a fast-expanding business process outsourcing industry,” Mr. Benard said.

Economic growth — while low considering the country’s stage of development — is steady and the outlook rosy for the medium term, S&P noted.

Continued political stability could stimulate private sector participation, it said. Ongoing fiscal consolidation, meanwhile, can free up revenues for much-needed public investments.

The debt watcher said these eclipse several weaknesses in the Philippines’ credit profile: low income levels, evolving political institutions and weak revenue collections.

“A high, albeit declining, interest burden constitutes an additional rating constraint. The interest burden of 13% of general government revenues is high, largely because revenues remain low relative to the size of the economy,” Mr. Benard added.

Foreign currency debt is also a worry at 42% of GDP. Debt service costs could be vulnerable to adverse exchange rate movements, he said.

For the Philippines to make the leap to investment grade, it must improve on political and institutional factors, S&P advised. Structural revenue reforms must also be undertaken.

The debt watcher warned that a downgrade could be issued if the government wavered in its commitment to fiscal consolidation or if its external liquidity position deteriorated.

Economic managers, meanwhile, welcomed news of the upgrade.

“[T]his only gives us more confidence to continue with the work we have started towards macroeconomic stability, fiscal sustainability and inclusive economic growth,” Finance Secretary Cesar V. Purisima said.

Secretary Ramon A. Carandang of the Presidential Communications Development and Strategic Planning Office hailed the Philippines’ strong fiscal position, especially as other countries battle debt woes.

“At a time when countries around the world are debating austerity versus stimulus, we have had the fiscal space to provide stimulus without weakening our fiscal position,” he said.

The country now has two BB+ ratings, from S&P and Fitch Ratings. Fitch affirmed its assessment last month.

The Philippines is rated a Ba2 by Moody’s Investors Service, two notches below investment grade, but the debt watcher raised its outlook to “positive” from “stable” in May, indicating that an upgrade is possible in the next 12 to 18 months.

“Two out of three of the major credit rating agencies now have us one notch below investment grade. We can now clearly make our case for an investment grade status,” Mr. Purisima said. –DIANE CLAIRE J. JIAO, Senior Reporter, Businessworld