Bangkok--7 Jan--Moody's
Moody's Investors Service has today changed the outlook on the Government of the Philippines' Ba3 foreign and local-currency bond ratings to positive from stable.
The key drivers for the decision are:
(1) the strengthening trend in the Philippines's external payments position which has significantly reduced the vulnerability of government finances to external shocks;
(2) the successful conduct of monetary policy which has anchored inflation expectations and has also helped to lower the government's cost of funding; and
(3) improved prospects for economic reform policies which will likely have positive effects on government finances, investor sentiment, and economic growth.
The rating action also applies to the Philippines's Ba3 ceiling for foreign currency (FC) bank deposits. The outlook on the Ba1 country ceiling for FC bonds, however, remains stable and the "Not Prime"short-term ratings and ceilings remain unaffected by this action. These ceilings act as a cap on ratings that can be assigned to the foreign currency obligations of other entities domiciled in the country.
In a related rating action, the outlook on the issuer rating for the country's central bank, the Bangko Sentral ng Pilipinas (BSP), is also changed to positive from stable.
RATIONALE FOR THE POSITIVE OUTLOOK
"An increasingly strong external payments position and well-anchored inflation expectations have provided the new government an advantageous position from which to pursue its reform agenda," said Mr. Christian de Guzman, an Assistant Vice President at Moody's and its lead sovereign analyst for the Philippines. "Foreign exchange reserves continue to accrue at record levels on the back of robust overseas foreign worker remittances, services exports, and sizeable capital inflows.
The BSP's inflation targeting regime has gained traction and has contributed to macroeconomic stability. This is tangibly reflected in a lower level of inflation than most Ba-rated peers and in lower funding costs to the government."
Prospects for greater political stability following the unambiguous outcome of the May 2010 presidential elections has added further momentum to resilient economic growth by encouraging greater inflows of foreign direct investment and in boosting domestic consumer confidence.
The government has also effected a notable turnaround in fiscal management in its first semester in office. In level terms, the cumulative fiscal deficit over the second half of the 2010 is projected to be half the size of that in the first half largely owing to expenditure restraint .
"While these developments suggest a likely return to fiscal consolidation, the government's balance sheet is still characterized by a large stock of debt relative to either revenues or GDP as compared with its rating peers," added Mr. de Guzman. "Moreover, the heavy burden of interest payments as a share of revenue and expenditure remains much greater than other Ba-rated governments, but the trend has been improving ."
FACTORS TO BE CONSIDERED: WHAT WOULD MOVE THE RATING UP?
Moody's assessment over the near term of the Philippines' credit fundamentals will focus on the national government's ongoing commitment to fiscal consolidation in the context of the improvements in the economic environment. Most likely, this will require continued expenditure restraint and improved revenue performance.
Another area we will evaluate is whether the government can successfully begin implementation of its public-private partnership program for infrastructure development. As this program forms a key pillar of the Aquino administration's economic agenda, successful execution of associated projects would provide a bellwether for an improved business climate and growth prospects in general.
In addition, Moody's will monitor the capability of BSP to continue to dampen inflationary pressures in an environment of higher food and fuel commodity prices and potentially volatile capital flows.
PREVIOUS RATING ACTION & METHODOLOGY
Moody's last rating action on the Philippines was taken on July 23, 2009 when the rating agency upgraded the sovereign rating from B1 to Ba3 and assigned a stable outlook.
The principal methodology used in rating the government of the Republic of the Philippines is "Moody's Sovereign Bond Methodology", published in September 2008, which can be found at www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Rating Methodologies sub-directory on Moody's website.