MANILA – (UPDATE 4, 5:19 p.m.) Fitch Ratings has lifted the Philippines’ credit ratings to investment grade, the first time the country has bagged the seal of good fiscal housekeeping.
In a statement, the international credit rating firm on Wednesday said it hiked the country’s long-term foreign-currency issuer default rating (IDR) to ‘BBB-‘ from ‘BB+’. Similarly, the long-term local-currency IDR was raised to ‘BBB’ from ‘BBB-‘.
An investment grade rating makes it cheaper for the Philippines to borrow money abroad. As well, the upgrade opens the doors to more foreign investors who had been barred from placing their money in the country when it was still below investment grade or junk.
Fitch assigned stable outlooks on both ratings, which means that the country’s credit score is unlikely to change in the near term.
In upgrading the Philippines, Fitch cited the country’s improving balance sheet vis-a-vis sovereigns that are rated ‘A’. A foremost strength is the Philippines’ recurring current account surplus, bolstered by remittances, which comprised eight percent of the country’s gross domestic product (GDP) last year and “proved resilient even through the shock of the global financial crisis.”
The ratings agency credited fiscal reforms started under the term of former President Gloria Macapagal Arroyo, but also noted how governance – the centerpiece of the current Aquino administraion – has also strengthened the Philippine momentum.
A second key strength was the Philippine economy’s resilience, which expanded 6.6 percent, above the government’s 5-6 percent target for 2012. In this, the agency credited “improvements in fiscal management begun under President Arroyo.”
A third reason for the upgrade is the Philippine government’s fiscal discipline, having reduced the country’s vulnerability to external shocks. Fitch cited fiscal efforts begun in the Arroyo administration and carried over to the Aquino government.
Fitch added: “Favourable macroeconomic outturns have been supported in Fitch’s view by a strong policy-making framework. Bangko Sentral ng Pilipinas’ (BSP) inflation management track record and proactive use of macro-prudential measures to limit the potential emergence of macroeconomic and financial imbalances is supportive of the credit profile. Inflation has been in line with ‘BBB’ peers on average over the past five years.”
Key Assumptions
In its statement, Fitch stressed that “the ratings and Outlooks are sensitive to a number of assumptions. The agency assumes the Aquino administration will persist with its fiscal, governance and social reform agenda. Fitch estimates trend GDP growth for the Philippines in a range of 5%-5.5%.”
It added that the ratings “incorporate an assumption that the Philippines is not hit by a severe economic or financial shock sufficient to cause a significant contraction in GDP and trigger stress in the financial system.”
Fitch also assumes that “there is no materialisation of severe risks to global financial stability that could impact emerging market economies, such as a breakup of the euro zone or a severe economic crisis in China.”
Meanwhile, the agency said that the Philippines, to protect its new standing, must guard against:
“…a reversal of reform measures and deterioration in governance standards; sustained fiscal slippage, leading to a higher fiscal debt burden; deterioration in monetary policy management that allows the economy to overheat; and instability in the banking sector, leading to a crystallisation of contingent liabilities on the sovereign balance sheet.”
“Landmark achievement”
“We welcome and thank Fitch Ratings for recognizing the gains the country has made in the past years. After successfully reversing a decade of decline in our credit ratings, President Aquino’s tuwid na daan has led us to investment grade rating for the first time in our history,” Finance Secretary Cesar V. Purisima said in a text message to reporters.
“This is the clearest and most definite affirmation that good governance is indeed good economics,” he added.
Bangko Sentral ng Pilipinas Governor Amando M. Tetangco Jr. said the upgrade is a “landmark achievement” for the country as it is a recognition of the gains it had from the structural, economic, financial and good governance reforms installed in the past several years.
“The investment upgrade should inspire the entire government bureaucracy and the Filipino people to capitalize on the opportunities that will arise from the rating upgrade. We should continue to work together not only to achieve higher credit ratings but also to ensure that the gains from these benefit most of our people,” Tetangco said.
In a text message, Socioeconomic Planning Secretary Arsenio Balisacan said the investment grade rating reflects confidence by the investment community on the country and economy.
The Philippines’ upgrade to investment grade “will open up a lot funds which are not allowed to invest in below investment grade countries,” said Trade Secretary Gregory L. Domingo, adding that these funds are expected to pour into the country in the “short-term, medium-term and long-term.”
Norio Usui, country economist at Asian Development Bank, said the Philippines’ “unprecedented” rating upgrade “can trigger the kind of investment that will help carry the country into its next phase of development.”
“Prudent measures to attract investment, improve the business climate and diversify the economy have paved the way for growth. Now it’s up to the authorities to make that growth more inclusive by creating more and better jobs,” he said. — With reports from Darwin G. Amojelar, Jose Bimbo F. Santos and Ben Arnold O. De Vera, Likha Cuevas-Miel, InterAksyon.com
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