Investment grade rating secured

The Philippines secured its first investment grade credit rating on Wednesday, courtesy of debt watcher Fitch Ratings, along with a stable outlook that is expected to lead to more foreign investments, increased access to credit and reduced borrowing costs.

In a statement, the credit rater said it had raised 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-’.

Fitch cited the Philippines’ robust economy, strong external position, improvements in the government’s fiscal management program and the Bangko Sentral ng Pilipinas’ (BSP) appropriate use of monetary policy to support growth.

“The Philippine economy has been resilient, expanding 6.6% in 2012 amid a weak global economic backdrop. Strong domestic demand drove this outturn,” the debt watcher said, adding that it expects the economy to grow by 5.5% this year.

Fitch also cited the country’s persistent current accounts surplus on the back of strong remittance inflows, which have proven resilient amid a weak global environment.

The country’s debt-to-gross domestic product (GDP) ratio, Fitch noted, also improved due to the government’s sound fiscal management where debt maturities were lengthened and the foreign component of liabilities was reduced, making it “more resilient to shocks”.

Stable macroeconomic fundamentals were also supported by the central bank’s strong policy-making framework.

“BSP’s inflation management track record and proactive use of macroprudential measures to limit the potential emergence of macroeconomic and financial imbalances is supportive of the credit profile,” it said.

Moving forward, however, Fitch said the government must be able to sustain the gains posted over the past few years to be able to gain a further upgrade.

“There must be … an uplift in the investment rate that enhances growth prospects without the emergence of macroeconomic imbalances,” it stressed.

Governance reforms, for one, which it noted have been “a centerpiece of the Aquino administration’s policy efforts,” must continue to be a priority.

Fitch also said that the revenue base had to be further broadened, as revenue take as a percentage of GDP continues to be low, having settled at only 18.3% last year.

“This limits the fiscal scope to achieve the government’s ambition of raising public investment,” it said.

Fitch also warned that a reversal of reform measures, fiscal slippage and weak monetary policy could warrant a negative rating action.

GOV’T HAILS UPGRADE

The government hailed the rating upgrade, with economic managers noting that it will help the country sustain its growth and make this more inclusive.

“This is an institutional affirmation of our good governance agenda: Sound fiscal management and integrity-based leadership has led to a resurgent economy in the face of uncertainties in the global arena,” President Benigno S. C. Aquino III declared.

Finance Secretary Cesar V. Purisima noted that the investment grade score would give the country access to low-cost funds and that lower borrowing costs would also allow the government to spend on developing the economy’s various sectors.

“[It] encourages more investments, which in turn will lead to more jobs and greater incomes for our people,” Mr. Purisima said.

State officials vowed that the government would continue to pursue its reform agenda, with Budget Secretary Florencio B. Abad saying that work would continue in “establishing real transparency, accountability, and openness in the Philippine bureaucracy.”

“Ultimately, we intend to facilitate socio-economic growth that is truly inclusive, where jobs are successfully created and the dividends of improved governance are cascaded to all Filipinos,” Mr. Abad said.

Central bank Governor Amando M. Tetangco, Jr, for his part, said: “From our end at the BSP, we remain committed to our mandate of maintaining a stable inflation environment supportive of economic growth, and on enhancing governance standards of financial institutions in line with the national priority of good governance.”

WARNINGS FROM BUSINESS SECTOR

Business groups warned, however, that despite the upgrade, foreign investments would not come in until further reforms are made.

“Surely the investment grade upgrade is good news but foreign direct investments (FDI) will not enter the country until there is much to be done like opening up the economy, [and] having consistent policies and reforms,” American Chamber of Commerce of the Philippines Director Robert M. Sears said.

The sentiment was echoed by European Chamber of Commerce of the Philippines Vice-President Henry J. Schumacher, who said: “investment grade will further raise the awareness that the Philippines has the potential for investment/FDI take-off, but still, the reasons why investors go somewhere else need to be addressed”.

Among the policy reforms foreign business groups are pushing is the relaxation of foreign ownership limits set by the Constitution.

Filipino business groups, meanwhile, were also cautious about the impact of the investment grade rating.

“We should focus on coming up with a clear, sound industrial policy to create more jobs aside from tourism and reforming agriculture. Also ensure effective tax collection and less wastage of funds,” said Crisanto S. Frianeza, secretary-general of the Philippine Chamber of Commerce and Industry. –Bettina Faye V. Roc, Reporter, BUsinessworld

“The upgrade was expected because of the reforms made and now the issue is how to aggressively pursue these to fruition,” he added.
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