Moody’s upgrades the Philippines credit rating outlookPosted on May 31st, 2012 under Biz Progress
The Philippines received its sixth upgrade in less than 2 years after New York-based Moody’s Investors Service upgraded the credit rating outlook of the Philippines to positive from stable, paving the way for a rating upgrade within the next six months to 18 months.
Moody’s assistant vice president Christian de Guzman said the credit rating outlook of the Philippines was upgraded on the back of the country’s continued trend fiscal and debt consolidation as well as the enhanced finance-ability of government debt.
“The government of the Philippines has continued to demonstrate prudence in its fiscal management, as characterized by low budget deficits relative to its rating peers and a steadily declining level of debt relative to GDP. Such outcomes are the result of expenditure restraint and improved revenue performance,” De Guzman said.
This is the sixth upgrade received by the Philippines since President Aquino assumed office in June of 2010. London-based Fitch Ratings rates the country’s sovereign credit at one notch below investment grade while Moody’s as well as Standard & Poor’s rate the country at two notches below investment grade.
Despite the absence of legislative reforms, de Guzman pointed out that more effective tax administration measures have resulted in revenue growth outpacing nominal gross domestic product (GDP) growth over the past five quarters.
And although spending disbursements have accelerated since late 2011, he said the uptick in revenues has led to the faster-than-expected consolidation of the country’s deficits and debt burden.
The Philippines booked a budget surplus of P31 billion last April as revenues increased due to the tax-filing season. The country recorded a budget deficit of P2.88 billion in the first four months of the year, a reversal of the P61 million surplus booked in the same period last year.
The government hopes to contain this year’s budget deficit at roughly P280 billion or 2.6 percent of GDP from the P197.8 billion deficit incurred in 2011.
De Guzman said Moody’s expects the revenue growth to improve further upon the passage of legislation aimed at restructuring excise taxes on alcohol and tobacco products.
“Nevertheless, deeper structural reforms may be necessary for revenue mobilization to catch up to levels similar to those of Philippines’ rating peers,” he added.
According to him, active debt management coupled with the increasingly solid track record of inflation management by the Bangko Sentral ng Pilipinas (BSP) has allowed for an improvement in the country’s debt structure, including lower average borrowing costs and foreign currency exposure, as well as longer average maturities.
He also cited the country’s robust external payments position as the gross international reserves (GIR) of the Philippine is expected to hit a new record level of $79 billion this year.
“The sovereign’s vulnerability to global financial market shocks has been reduced by the build-up of foreign exchange reserves, resulting in turn from robust current account surpluses and healthy capital inflows in recent years,” he said.
The Cabinet-level Development Budget Coordination Committee (DBCC) sees the country’s GDP growing faster at a range of five percent to six percent this year after slackening to 3.7 percent last year from 7.6 percent in 2010 due to weak global trade and cautious government spending.
To achieve a credit rating upgrade, de Guzman said the Philippines should pursue structural improvements in revenue mobilization, continued reductions in the government debt burden, and accelerate investment spending that places the economy on a path of stronger growth.
“These developments should also be accompanied by the continued health of the country’s balance of payments and stability of the financial system,” he said.
He said factors that could lead to a downgrade in rating or outlook include a destabilization of macroeconomic conditions that could lead to an unmooring of inflation expectations and an adverse effect on financing condition and a shift away from the focus on good governance, resulting in turn in a deterioration in the investment climate and, ultimately, revenue performance.
BSP Governor Amando Tetangco Jr. said the upgrade was based on the country’s continued fiscal consolidation and good debt management underpinned by sustained robust external position and solid track record of inflation management.
“This positive rating action is therefore welcome and is a sign that Moody’s is seeing the fruits of good governance on all fronts – fiscal, monetary, and external,” Tetangco said.
The Aquino government’s good governance battle is translating to prudent spending on the part of the national government as well as improved revenue collection by the Bureau of Internal Revenue (BIR) and the Bureau of Customs (BOC).
“The message we have been trying to send to investors in general and credit rating agencies in particular is that fiscal performance can improve with good governance,” he added.
For his part, Finance secretary Cesar Purisima said the upgrade brings the country closer to the much coveted investment grade credit rating.
“This is one more step in our march towards investment grade, towards reducing the gap between the market rating and the credit rating, and more importantly towards a more sustainable growth path,” Purisima stressed.
He pointed out that the Aquino administration would continue to focus on good governance as the basis for good economics, on fiscal sustainability, on macroeconomic stability and on opening up the country to business and tourism.