Economic Update

Citing solid growth, political stability, greater accountability and a low level of exposure to external shocks, Moody’s has joined Standard & Poor’s and Fitch in assessing the Philippines’ sovereign credit rating as investment grade, with the agency holding out the possibility of a further upgrade.

On October 3, Moody’s announced it was raising the country’s sovereign rating one level from Ba1 to Baa3, the lowest rung on the investment grade ladder. The Moody’s decision tracks similar moves by other ratings agencies Fitch and Standard & Poor’s, which lifted the Philippines to investment level in March and May, respectively.

Improved prospects

The agency said that improved fiscal management and budgetary deficits narrower than the Baa3-rated median meant that the government was building a strong platform for future growth and economic stability. The Philippines has also managed to transition much of its financing to medium- and long-term domestic debt, reducing its exposure to foreign capital flows.

“The stability of the Philippines’ funding conditions – during the recent bout of market volatility in emerging markets – points to the country’s relative lack of vulnerability to external financial shocks,” the Moody’s statement said.

Moody’s also held out the prospect of a further upgrade in the sovereign credit rating by saying that the outlook for the economy was “positive”, a position that it said reflected the expectation of continued outperformance by the Philippines relative to it peers.

One of the factors that prompted Moody’s to raise its assessment of the Philippines economy was its continued strong growth, with GDP expanding by 6.8% in 2012.

“The Philippines’ economic performance has entered a structural shift to higher growth, accompanied by low inflation,” Moody’s said. “These levels are among the fastest rates of growth in the Asia-Pacific and across emerging markets globally.”

The economy expanded at an annualised rate of 7.6% for the first half of this year, with analysts predicting growth of least 7% for 2013. This would be above the average for the region, according to the latest projections from the Asian Development Bank, which in early October lowered its average regional GDP growth rate to 6%, down from 6.6% earlier this year.

Government’s response

Filipino officials welcomed the Moody’s decision, with presidential spokesman Ricky Carandang saying the upgrade reflected the international community’s continued confidence in the government’s fiscal management.

According to Amando Tetangco, governor of the Bangko Sentral ng Pilipinas, the upgrade would boost confidence among domestic investors, as well as those from overseas.

“Clearly Moody’s has acknowledged the strong upside potential and the constructive dynamics of the economy that should enable it to ride out the volatilities in global financial markets,” Tetangco said following the agency’s announcement. “This development should bode well for more investments, both local and foreign, in the country.”

Though in the main positive, the Moody’s report did carry a number of warnings, saying that the government’s revenue generation remains weak when compared with other investment-grade countries and that sovereign debt as measured against GDP will remain higher than most similarly rated peers. The report also said the emergence of macroeconomic instability could exert downward pressure on the rating, though adding that a downgrade is unlikely over the short term.

Flow-on effect

The local banking sector received a boost from the sovereign upgrade, with Moody’s raising the rating of four lenders – Banco de Oro Unibank, Bank of the Philippine Islands, Land Bank of the Philippines and Metropolitan Bank and Trust Co. – to investment grade on the same day.

In announcing its decision, the ratings agency cited an improved operating environment for banks, as well as the sovereign debt upgrade. The systemic importance of the four lenders means that the government would be quick to support them in times of stress, and a strengthened credit rating would certainly help the state source any necessary funds, should the need arise. Moreover, all four institutions hold high levels of government debt, increasing the correlation between the financial health of the state and the lenders.

It is unlikely to be long before the Philippines feels the further impact of the Moody’s upgrade, with international borrowing costs set to ease and a greater interest among investors both in the broader economy and in stocks and bonds. Having successfully transitioned much of its borrowing to the domestic debt market, the government will likely be hoping that the improved rating will attract more foreign direct investment, an area where the Philippines remains weak relative to its regional peers.