MOODY'S Investors Service on Monday raised the Philippines' sovereign credit rating to one notch below investment grade, citing the country's strong economic prospects and stable financial system.

The international ratings service also said that a recent breakthrough in peace talks, aimed at ending a decades-long Muslim separatist rebellion in the south of the country, had improved the country's long-term economic potential.

Moody's raised the Philippines to Ba1 from Ba2, while maintaining the ratings outlook at "stable".

"Despite the headwinds from softening external demand, the Philippines has demonstrated considerable economic strength and fiscal resilience," Moody's said in a statement.

"The country is poised to record a combination of faster growth, lower inflation, exchange rate appreciation and an increase in foreign exchange reserves, while maintaining trend debt consolidation."

Over the longer term, Moody's said that the peace pact between the government and the Moro Islamic Liberation Front (MILF) signed on October 15 could eventually spur economic growth in the resource-rich conflict zone.

The MILF has been struggling since the 1970s for an independent homeland on Mindanao island in the southern Philippines. The accord signed this month aims for a final peace deal by 2016, with the MILF controlling an autonomous region.

The upgrade comes after Standard & Poor's raised the Philippines' long-term foreign currency credit rating to within one rung of investment grade in July, citing the government's improving finances.

Moody's upgraded the Philippines' credit rating to Ba2 in June last year.

Gov. Amando Tetangco Jr. of The Bangko Sentral ng Pilipinas said that he was "delighted" by the upgrade.

"With the government's concerted efforts and with the support of the private sector, the Philippines should achieve an investment grade credit rating sooner rather than later," he said in a statement.

The Philippine economy grew by 6.1 percent in the first half of this year and the government is hopeful of maintaining that expansion pace throughout 2012.

Inflation averaged 3.2 percent in the first nine months of the year, allowing the central bank to cut interest rates four times.

The benchmark overnight borrowing rate now stands at 3.50 percent, with the overnight lending rate at 5.50 percent.