Bangkok--22 Mar--Standard & Poor's
Standard & Poor's Ratings Services today assigned its 'BB' senior unsecured debt rating to the proposed issue of U.S.-dollar-denominated global bonds by the Republic of the Philippines (foreign currency BB/Stable/B; local currency BB+/Stable/B; ASEAN scale axBBB+/axA-2). The benchmark size issue matures in March 2026.
The strength of the Philippines' external balance sheet and favorable growth trajectory support the sovereign credit ratings on the country. High public sector and external debt, and a weak fiscal profile constrain the ratings.
The Philippines' external liquidity indicators have continually improved over the past several years, even during the global financial crisis and the ensuing recession. The structural strengths of the current account appear sufficiently well entrenched such that current account surpluses of about 3% of GDP are likely to prevail in the medium term. Net international reserves, at US$64 billion at the end of February 2011, exceed the country's total external debt, and provide 6x short-term external debt cover based on residual maturity.
In the past ten years, the Philippines' real GDP growth averaged 4.6% without significant fluctuation, despite political volatility and low investment due to institutional and structural impediments. Medium-term growth prospects remain favorable with the ongoing expansion of the service sector, and if the increased political stability can generate greater investment growth. We forecast a higher trend growth path of 5.0%-5.5% annually in the medium term.
A rating constraint on the Philippines remains its high public sector debt, which limits discretionary spending, particularly for much needed capital investment. Gross general government debt (excluding central bank debt, guaranteed contingent liabilities of public sector entities, and intra-government debt holdings) is an estimated 48% of 2010 GDP--above the 38% for similarly rated sovereigns.
The narrow tax base and high incidence of tax evasion have been the principal contributing factors to weak public sector finances, and remain additional rating constraints. After modest improvements over the recent years, revenue growth weakened notably in 2010, rising by 7.5% over 2009, well below an estimated nominal GDP growth of 11%. A structural transformation of the revenue base will be key to sustaining the government's efforts to boost collection efficiency.
We could raise the sovereign credit ratings on evidence of material and sustainable structural revenue improvement, or further strengthening of the external balance sheet thus reducing vulnerability to shocks. Conversely, we could lower the ratings in the event that the government's commitment to fiscal consolidation weakens, resulting in an upward debt trajectory, or if the external liquidity position deteriorates significantly, possibly precipitated by unfavorable economic policies or political instability.
RELATED CRITERIA AND RESEARCH
Philippines (Republic Of), published Dec. 23, 2010
Sovereign Credit Ratings: A Primer, published May 29, 2008
Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.
Media Contact:
David Wargin, Washington, DC (1) 202.383.2298,
[email protected]
Analyst Contacts:
Agost Benard, Singapore (65) 6239-6347
Takahira Ogawa, Singapore (65) 6239-6342