Credit where it’s due: Ratings agencies confirm a strong long-term outlook

In its annual report released in March 2012, Standard & Poor’s (S&P) noted that although it is a mixed picture for Asia-Pacific sovereigns for the next 12-18 months, countries in the region face global and domestic rises from a relatively strong position. For the Philippines this is especially true as the government has shown progress in areas such as reforming the economy, improving governance and fiscal consolidation.

These measures have not gone unnoticed. Indeed, the Philippines’ sovereign rating was increased to Ba2 from Ba3 by Moody’s in June 2011 and to BB+ by Fitch in the same month. S&P boosted its outlook on the nation’s BB grade to positive in December. An improved fiscal situation is expected to bring further upgrades.

HOUSE IN ORDER: The administration has already been quite successful in getting the country’s fiscal house in order and has successfully staunched a flow of red ink that had led to a record budget deficit of P314.5bn ($7.14bn) in 2010. According to preliminary results in February 2012, the budget deficit narrowed to P192bn ($4.4bn) in 2011 against a targeted ceiling of P300bn ($6.8bn). Spending slid by 2% in the first 11 months of 2011. The government has reduced the shortfall mostly via improved revenue collection through aggressive pursuit of tax evasion. Philippine officials told the ratings companies that improving revenue collections and “prudent spending” mean the country does not currently need new or higher taxes.

Moody’s explained its upgrade, saying in a statement that “the rating is supported by sound macroeconomic policy management as inflation has remained relatively subdued despite historically high rates of growth in 2010... [T]he Philippines’ external payments position continues to be bolstered by healthy remittance inflows, as well as increasingly large receipts from the business process outsourcing (BPO) sector.”

Fitch also praised government efforts, saying the upgrade “reflects progress on fiscal consolidation against a track record of macro stability, broadly favourable economic prospects and strengthening external finances.” As a result of these developments, the Philippines is able to borrow at rates similar to nations perceived as “more advanced, more stable, more worthwhile to lend to”, President Benigno Aquino III said during a press conference in early 2012.

GOING FORWARD: A further credit upgrade toward investment grade should be on the cards, according to local officials. The Philippines’ creditworthiness has been improving despite the troubles roiling the eurozone, the Bangko Sentral ng Pilipinas (BSP) governor Amando Tetangco noted at the start of 2012. “I don’t think that the eurozone’s troubles will impact our own credit standing,” Tetangco said after S&P cut the credit ratings of nine countries in the eurozone due to that region’s debt crisis. There have been concerns that a prolonged debt crisis in Western markets would sap demand for the Philippines’ exports and put a dent in foreign direct investment. Some local economists have also pointed out that the 3.7% economic growth in 2011, which came in below forecast, may delay a new ratings upgrade. Nevertheless, S&P said in its report that the Philippines should have a respectable growth rate in 2012, while advanced economies will likely post growth of less than 1% or even enter recession. S&P said it expects the Philippines to see a growth rate of 4-4.5% in 2012, noting that local purchasing power should remain healthy while inflation should remain manageable. However, export earnings will also likely stay low. “While all countries in Asia-Pacific will feel the heat of a sharp slowdown or a recession in Europe and the US, those with greater reliance on exports and with strong trade linkages are most vulnerable,” S&P said in a statement. The 2012 growth-rate projection for the Philippines is still better than those for Hong Kong (2. 5-3%), South Korea (2.8-3.3%), Singapore (2-2.5%), Taiwan (2.3-2.8%) and Thailand (3.5-4%).

HEADING TO INVESTMENT GRADE: Cesar V Purisima, secretary of the Department of Finance, who has been lobbying rating agencies for further upgrades, has said financial markets have rated the country as if it were investment grade. “Two of the three ratings agencies have us two notches below the ratings which two of them have on Indonesia. [Fitch Ratings lifted Indonesia to investment grade in December 2011.] I believe we deserve a second look,” Purisima told TheWall Street Journal. "I hope they will switch to view us as investment grade sooner than later, not just to lower our cost of borrowing, but also to attract new investors who can only invest in investment-grade countries." The Philippines has already started to reap some of the rewards from the recent upgrades. In January 2012, the Philippines raised $1.5bn in dollar-denominated 25-year global bonds at a record-low yield. The bond, due in January 2037, carries a 5% coupon and was offered at par, translating into 1.9-percentage-point premium over benchmark US Treasuries. This yield is comparable to European countries such as Spain and Italy, according to Purisima. The issue was heavily oversubscribed. Sale proceeds will help boost the economy with expenditure on roads, ports and waterworks.

BANKS STABLE: The Philippines’ banks have also enjoyed a favourable outlook from international ratings agencies. Moody’s announced in December 2011 it had maintained its stable outlook for banking since domestic operating conditions will stay positive for business growth and support banks’ robust credit fundamentals over the next 12 to 18 months.

In its report on the banking system, the agency said that “the outlook reflects our analysis that consistently improving asset quality, good liquidity and favourable capital profiles of Philippine banks would act as a cushion in a significantly adverse operating environment.” Of the nine banks Moody's rated, (which constitute 70% of the market), all received a stable outlook.

Fitch Ratings too has maintained a “stable” outlook on Philippine banks, stating they were likely to stay in relatively decent shape despite uncertainties plaguing the global economic environment. Fitch noted the strong liquidity and capital base of Philippine banks would help them alleviate any impact from external risks. “Fitch expects most rated banks to maintain sound core capital, which is vital in mitigating risks from their balance sheets and the operating environment,” the firm said in its report. “Most rated banks in the country have liquid balance sheets and deposits as their main funding source, thanks to ample domestic liquidity.”

A BRIGHT FUTURE: Despite recent credit upgrades, local officials here still feel the Philippines’ economy is underrated and there is expected to be a concentrated push in lobbying international agencies to boost the rating to investment grade. As exhibited by its lowering borrowing costs on sovereign debt issuings, the country is on track to move up the international pecking order for investment. In a further sign of confidence, the Philippines has switched from being a borrower to a creditor to the IMF, making available $251.5m to the lender in December 2011. Thus, despite a wary global growth outlook and external funding pressures as well as potential unexpected changes in policy or economic environments, the Philippines appears to be in a relatively strong position to face any new future risks.