PHL wins first investment upgrade

FOR the first time, the Philippines has attained investment-grade status, courtesy of the UK-based Fitch Ratings, in the first of an expected series of upgrades seen to result in even more foreign inflows to help accelerate the economy down the line.

Fitch Ratings has rated the country’s credit a triple-B minus or “BBB-” from double B plus or “BB +”, indicative of an economy better able to honor its debts whether such were obtained domestically or abroad.

“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 Aquino said in a statement.

“It serves to encourage even greater interest and investments in our country. It is one among many other positive developments that demonstrates the reclamation of our national pride: Truly, what was once known as the perennial laggard of Asia is taking off, and is accelerating toward its goal of an equitably progressive society,” the President said.

Fitch’s analysts credited former President Gloria Macapagal-Arroyo and the role she played in convincing an obstinate legislature that an expanded value-added tax system was key to the country’s fiscal future.

Fitch said the much-maligned tax law later resulted in “improvements in fiscal management begun under President Arroyo [which] made general government-debt dynamics more resilient to shocks.”

“Strong economic growth and moderate budget deficits have brought the general government [GG] debt/GDP [gross domestic product] ratio in line with the ‘BBB’ median. The sovereign has taken advantage of generally favorable funding conditions to lengthen the average maturity of GG debt to 10.7 years by end-2012 from 6.6 years at end-2008. The foreign-currency share of GG debt has fallen to 47 percent from 53 percent over the same period,” the UK credit watchdog said.

Apart from better fiscal management started under the Arroyo administration, Fitch cited as key drivers to the upgrade the country’s strong external sector, the persistent current-account balance that the watchdog acknowledged as having been fed by overseas worker remittances and the overall resilience of the economy.

The agency also cited as additional factors improvements in fiscal management, and the favorable macroeconomic outturns, supported by a strong monetary-policy framework under the Bangko Sentral ng Pilipinas (BSP).

While the upgrade has largely symbolic significance for an economy that has since won the seal of approval from a horde of foreign-fund managers who look at its markets with a positive eye, monetary and finance officials welcomed the upgrade as an affirmation of the reform measures which had roots in those year before President Aquino came to Malacañang.

BSP Governor Amando M. Tetangco Jr. said the Fitch upgrade was a “landmark achievement for the Philippines and is a recognition of the gains from the structural economic, financial and good government reforms that have been implemented in the past several years.”

“The upgrade to investment-grade status should inspire the entire government bureaucracy and the Filipino people to capitalize on the opportunities that will arise from this positive credit-rating action.

“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. 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,” Tetangco said.

Finance Secretary Cesar Purisima cited the role played by the President’s anti-corruption daang matuwid on an economy that posted growth averaging 6.6 percent last year in terms of GDP.

“The government remains determined to pursue tuwid na daan and to ensure that these reforms are irreversible. This is the only way we can maintain inclusive economic growth over the long term and achieve our developmental goals,” he said.

According to Fitch, the country’s external sector is considered stronger than country’s rated higher in the “A” credit category.

It also said a persistent current-account surplus (CAS), underpinned by remittance inflows, has led to the emergence of a net external creditor position worth 12 percent of GDP by end-2012, up from 6 percent at end-2010.

Remittance inflows were also worth 8 percent of GDP in 2012 and proved resilient even through the shock of the global financial crisis, the ratings agency noted.

Fitch expects a rising import bill stemming from strong domestic demand to lead to a narrower CAS and to stabilize the net external creditor position at a strong level through to 2014.

“The Philippine economy has been resilient, expanding 6.6 percent in 2012 amid a weak global economic backdrop. Strong domestic demand drove this outturn. Fitch expects GDP growth of 5.5 percent in 2013. The Philippines has experienced stronger and less volatile growth than its “BBB” peers over the past five years,” Fitch said.

The ratings agency also credited the BSP for crafting a strong policy framework that helped keep inflation at bay as well as its proactive use of macro-prudential measures that helped curb the potential emergence of macroeconomic and financial imbalances proving supportive of the country’s credit profile.

Inflation has been in line with ‘BBB’ peers on average over the past five years, the ratings agency said.

Some areas Fitch cited as needing government attention include so-called governance standards, as measured in international indices such as the World Bank’s framework, remain weaker than “BBB” range norms but are not inconsistent with a “BBB-” rating as a number of sovereigns in this rating category fare worse than the Philippines. Government reform has been a centerpiece of the Aquino administration’s policy efforts. Entrenching these reforms by 2016 is a policy priority of the government.

Also cited was the country’s average income at a low $2,600 versus ‘BBB’ range median of $10,300 in 2012, although this measure does not account directly for the significant support to living standards from remittance inflows.

The country’s level of human development (as measured in the United Nations Development Program’s index) is less of an outlier against “BBB” range peers.

Also cited was the country’s low fiscal revenue take of 18.3 percent of GDP in 2012, compared with a “BBB” range median of 32.3 percent.

This limits the fiscal scope to achieve the government’s ambition of raising public investment. The recent introduction of a “sin” tax, against stiff political opposition, will likely lead to some increment in revenues and underlines the administration’s commitment to strengthening the revenue base, Fitch said.

“This rating is unprecedented in the Philippines and can trigger the kind of investment that will help carry the country into its next phase of development,” said Norio Usui, country economist at the Asian Development Bank. “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.” –Jun Vallecera / Reporter, BUsinessmirror