Upgrade hinges on improved debt, sustained growth


Further improvement in debt management and economic growth may earn the Philippines another credit rating upgrade, Moody’s Investors Service said as the country’s rating approached a due date for review.

The last rating action taken by Moody’s on the Philippines was in October 2013, when the agency raised the country’s Ba1 sovereign credit rating to the minimum investment grade of Baa3 with a positive outlook.

According to the typical cycle, it usually takes 12 to 18 months before another actual credit-rating decision is made.

“Continued improvements in the country’s main debt metrics and growth dynamics, while at the same time maintaining macroeconomic stability, would support further upgrades,” Moody’s said in its latest credit opinion.

The credit ratings firm explained that its positive outlook reflects expectations of continued economic out performance by the Philippines relative to its rating peers, which, in turn, would further support debt consolidation and associated improvements in debt affordability and sustainability.

“The Philippine economy has started a structural shift to higher growth accompanied by low inflation. Real GDP [gross domestic product]expanded at rates of 6.8 percent in 2012 and 7.2 percent in 2013, among the fastest rates of growth in the Asia-Pacific and across emerging markets globally,” it said.

Moody’s said the country’s new growth path is being reinforced in part by improved fiscal management.

Weak revenue offset by growth
The agency also noted that although revenue generation remains weak compared with investment-grade sovereigns overall, revenue growth has accommodated sizeable increases in infrastructure and social spending.

“Since 2008, the Philippine government has regularly recorded fiscal deficits that are narrower than the Baa3-rated median. Primary surpluses recorded in eight of the past 10 years will likely continue over the five-year medium-term horizon, allowing for further consolidation of the government’s debt burden,” it added.

At the same time, the credit ratings firm acknowledged that the structure of government debt continues to improve, mitigating currency and refinancing risks.

It noted that the proportion of government debt denominated in foreign currency continues to fall, while the Treasury continues to proactively address refinancing risks by lengthening the average maturity of its debt to around 10 years, from about seven years as of end-2009.

“In addition, well-managed inflation and favorable liquidity conditions have contributed to lower interest rates that have enhanced debt affordability” it said.

Persistent BOP surpluses
In terms of the country’s external position, Moody’s said the balance of payments remains relatively healthy and is characterized by the persistence of a current account surplus on the back of strong remittances, subdued goods imports, and healthy services exports.

Moody’s also said that sustained political stability points to better prospects for reform over the second half of the current presidential administration, attributing improving third-party assessments of institutional quality and international competitiveness to the Aquino administration’s emphasis on good governance and administrative reform.

While not indicating when a further rating upgrade might occur, the agency said: “In view of the currently positive outlook on the Philippines’ sovereign rating, a downward rating movement is unlikely over the near term.”

However, Moody’s warned that an emergence of macroeconomic instability—which leads to a substantial deterioration in fiscal/debt metrics, a rise in debt-servicing costs, and/or an erosion of the country’s external payments position—would exert downward pressure on the rating.


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