UPDATE: Moody’s upgrades PH a notch to Baa2

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(Updated with additional details, official comment)

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The Philippines received another credit rating upgrade from Moody’s Investors Service on Thursday, with the outlook stable.

Raising the country’s credit rating by a notch to Baa2 from Baa3, the global ratings agency said it based its decision on ongoing debt reduction, aided by improvements in fiscal management; continued favorable prospects for strong economic growth, and limited vulnerability to the common risks currently affecting emerging markets.

A “stable” outlook by Moody’s means the new rating is likely to remain the same at least over the short term.

“The first driver of the upgrade is the decline in the Philippines’ debt burden, which has coincided with structural improvements in fiscal management,” Moody’s said.

The credit ratings agency noted the administrative reforms in key revenue-collecting agencies — most recently the Bureau of Customs – which have led to revenue improvement in excess of nominal gross domestic product (GDP) growth for a fourth consecutive year.

Moody’s stressed that budget transparency has been enhanced, in part by a mix of court-mandated reforms and procedural changes, although these developments have temporarily weighed on public spending. As a result, the Philippines’ fiscal deficit remains narrower than that of its rating peers, it said.

“Coupled with relatively robust economic growth, the Philippines’ fiscal performance has led to the convergence of general government debt as a share of GDP to the corresponding peer medians,” it said.

Moody’s also recognized rising private-sector investments that bode well for sustained growth and the economy’s limited vulnerability to external risks.

“In particular, the resilience of private investment portends the sustainability of higher overall growth relative to peers over the next two years,” it stated.

Resilience to global pressures

The ratings agency added that the third driver of the rating upgrade reflects the Philippines’ resilience to global pressures currently faced by a number of emerging market rating peers.

“This resilience limits the possibility that improvements in fiscal or economic performance would be significantly undermined,” it said.

On the other hand, the stable outlook on the new Philippine credit rating suggests balance between the upside and downside risk, Moody’s said.

Nonetheless, Moody’s said upward pressure on the sovereign rating could arise from a steady increase in income levels or greater revenue mobilization that would further bolster government finances.

“Conversely, the emergence of macroeconomic instability — which leads to a substantial deterioration in fiscal and government debt metrics and an erosion of the country’s external payments position — would exert downward pressure on the rating,” it added.

BSP welcomes Moody’s move

In a statement following the announcement, Bangko Sentral ng Pilipinas (BSP) Governor Amando Tetangco Jr. welcomed the credit-rating upgrade especially as the global economy remains fragile.

“The latest credit rating upgrade is a recognition of our efforts to keep the Philippine economy resilient amid constant challenges posed by the external environment. Contributing to this resiliency are the country’s comfortable external liquidity, strong financial system, and a favorable inflationary environment,” he said.

Tetangco added that the BSP will continue to implement prudent monetary policy and sound regulatory standards to safeguard its price and financial stability objectives and to help ensure the continued resilience of the Philippine economy.

Finance Secretary Cesar Purisima said Moody’s decision to further raise the country’s credit rating can be attributed partly to efforts of the government to institutionalize reform to help ensure that the agenda of good governance continues.

“The upgrade is an acknowledgment of the sound management of the economy. There should be no turning back as far as good governance is concerned; the only direction we should see for the Philippine economy is forward,” he added.

“The good governance agenda has brought significant improvement in the country’s competitiveness and credit worthiness over the past four years. Filipinos, therefore, will have to be vigilant to ensure that the commitment to good governance remains intact,” Editha Martin, executive director of the Investor Relations Office, added.

In October last year, Moody’s upgraded the Philippines’ sovereign credit rating by a notch from Ba1, a junk rating, to the minimum investment grade of Baa3, and at the same time assigned a positive outlook on the rating.

The move followed that of Fitch Ratings and Standard & Poor’s, which also raised by a notch their ratings for the Philippines to the minimum investment grade in March 2013 and May 2013, respectively.

Last year was the first time that the Philippines secured investment grades from the three major international credit rating agencies.

Then, in May 2014, S&P further upgraded its credit rating for the Philippines by a notch above the minimum investment grade.

Headwinds not country-specific

“The Moody’s upgrade is an early Christmas gift for the Philippines as ratings agencies continue to recognize the resiliency of the economy,” said Nicholas Antonio Mapa, Bank of the Philippine Islands associate economist.

Mapa said Moody’s upgrade indicated that the headwinds faced by the Philippines are not country specific but affects most of the emerging market space.

“Although this was a surprise, we would think that this would be as far as upgrades would go unless we learn to spend better. Part of the improvements in debt dynamics has been the budget surpluses we’ve seen this year,” he added.

The economist, however, said these improved numbers came at the expense of growth as government spending continues to stall, holding back the short-term and medium-term growth potential of the country.

“As such, the national government must now re-engineer its growth strategy, bringing spending to a bigger percentage of GDP. Other ratings agencies had flagged the improved fiscal numbers as it came at the expense of investment in key infrastructure,” he concluded.

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