Bangkok--15 Jun--Moody's Investors
Moody's Investors Service has today upgraded the the Government of the Philippines' Ba3 foreign and local currency long-term bond ratings to Ba2 from Ba3. The outlook is stable.
The "Not Prime" short-term ratings are unaffected by this action.
The key drivers for the decision are:
(1) The progress made in fiscal consolidation by the new Aquino administration; and
(2) The sustained nature of macroeconomic stability, coupled with continued strength in the external payments position, against a background of a significant pick-up in the momentum for economic growth.
The Philippines' long-term foreign currency (FC) bond ceiling was also raised to Baa3 from Ba1, while the long-term FC deposit ceiling was upgraded to Ba2 from Ba3. The short-term FC bond ceiling was raised to P-3, while the short-term FC deposit ceiling remains at "Not Prime." The outlook for these ceilings is stable.
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 addition, the local currency bond and deposit ceilings were unified at A2.
In a related rating action, the issuer rating for the country's central bank, the Bangko Sentral ng Pilipinas (BSP), was upgraded from Ba3 to Ba2 with stable outlook.
RATIONALE FOR THE UPGRADE TO Ba2
Over the first four months of 2011, the national government recorded a small fiscal surplus, building upon the notable turnaround in fiscal management seen during 2H 2010. Much of the improvement has been attributed to expenditure restraint, but there is also evidence of an uptick in revenue generation.
Of particular note is the fact that interest payments have fallen despite a larger stock of debt in peso terms, reflecting in turn the continued success of the BSP in anchoring inflation expectations and consequently debt-servicing costs. While we expect expenditures to increase significantly in 2H 2011, as the government commences its cornerstone infrastructure investment program, the rise will not likely derail the trend towards fiscal consolidation.
By demonstrating firm fiscal restraint, the government has bolstered its policy credibility and has improved prospects for reform. Nevertheless, continued uncertainty over the implementation of structural measures to improve revenue generation justifies the stable outlook for now. In addition, the government's budgetary interest burden and its debt overhang remain high when compared with its rating peers.
Moody's further notes that owing to continued prudence in macroeconomic management, solid growth momentum in the Philippines has not produced substantial overheating pressures -- either through inflation or a large deterioration in the current account.
However, headwinds stemming from softening growth prospects in the region have emerged, although these should be offset by a sustained improvement in domestic demand conditions.
The Philippines' external payments position is strong in relation to its rating peers, and vulnerabilities related to a possible sudden stop of capital inflows are mitigated by its growing foreign exchange reserves.
WHAT COULD CHANGE THE RATING--UP
Continued strength in the country's balance of payments and health of the financial system, coupled with sustained progress towards fiscal consolidation and debt reduction -- all these achievements will likely require policy prudence and additional fiscal reform, especially on the revenue side. Moreover, improvement in the investment environment will be required to place the economy on a path of strong, sustainable growth.
WHAT COULD CHANGE THE RATING--DOWN
A deterioration in government finances leading to rising interest costs and a greater debt burden; a structural weakening in the balance of payments, or uncontrolled inflation expectations that adversely affect financing conditions.
METHODOLOGY
The principal methodology used in this rating was Sovereign Bond Ratings published in September 2008.
REGULATORY DISCLOSURES
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.
Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of maintaining a credit rating.
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Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.
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Singapore
Christian de Guzman
Asst Vice President - Analyst
Sovereign Risk Group
Moody's Investors Service Singapore Pte. Ltd.
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Singapore
Thomas J. Byrne
Senior Vice President - Regional Credit Officer Sovereign Risk Group Moody's Investors Service Singapore Pte. Ltd.
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