A British multinational banking and financial services company expects the Philippines to receive its first investment grade rating in the second half of this year, given the country’s reform-focused government and solid external balances.

Election-related spending can also boost growth for one to two quarters before the actual casting of ballots.

Barclays Plc. said on Monday that “with external demand also gradually improving, we are revising up our growth forecasts: 2012 to 6.5 percent and 2013 to 5.9 percent—both up 30 basis points. With robust growth and rising inflationary pressures, we expect Bangko Sentral ng Pilipinas [BSP] to hike the policy rate 25bp in fourth quarter.”

It also recommend buying global peso notes to position for a ratings upgrade.

“We also like selling 10-year Philippines CDS [credit default swap] and selling the Philip ’21s. Demand dynamics remain solid for Philippine dollar bonds. Onshore demand for the bonds will overshadow buying driven by IG-index inclusion. We believe ROPs [Republic of the Philippines] will trade as tight as Brazil on an upgrade, and eventually settle between Mexico and Brazil,” it added.

The rating agency said that in the near term, the Philippines will expect weakness given the risk of further macroprudential measures and renewed concerns on the US debt ceiling/sequestration in February to March.

Barclay’s three-month forecast for the peso-dollar rate is P40.75.

[“Over the medium term], we are constructive, given the country’s solid balance of payments, positive ratings trajectory and the increasing credibility of government reforms. Our 12-month US
dollar/peso forecast is 39.50,” Barclays said.

”We are neutral RPGBs [peso-denominated government bonds] in a local-currency market portfolio as positive fundamentals and policy credibility are offset by stretched valuations. We expect the Philippines to appreciate roughly 2.5 percent versus the US dollar in 2013, in line with its peers,” it added.

However, the BSP is likely to resist significant Philippine strength on a Real Effective Exchange Rate basis.

“With historically stretched yield spreads and our view of a rate hike in fourth quarter, we think RPGBs are unlikely to repeat their 2012 performance,” Barclay’s said.

On December 20, Standard and Poor’s revised the Philippines’ outlook to positive, while maintaining a bond rating at BB+.

The agency cited the government’s improved capacity to undertake reform amid a more conducive political setting.

“We maintain our view that the Philippines will receive its first investment grade rating in second half 2013, with a follow-up upgrade likely in first half 2014. The sovereign’s peer group is an important determinant of ratings, as well, and with the Philippines’ credit metrics outperforming the group, there is a possibility that the Philippines could be upgraded to investment grade ratings sooner than expected,” Barclays added.