Fitch Ratings has upgraded the Philippines’ long-term foreign currency issuer default (IDR) rating to ‘BBB- stable’ from ‘BB+’ after much discussion that the country would be the next to join Indonesia in Asia’s investment grade sovereign universe.
“The Philippines' sovereign external balance sheet is considered strong relative to 'A' range peers, let alone 'BB' and 'BBB' category medians,” said Philip McNicholas, director at the ratings agency.
“A persistent current account surplus (CAS), underpinned by remittance inflows, has led to the emergence of a net external creditor position worth 12% of GDP by end-2012, up from 6% at end-2010.”
Market participants have been pricing in the likelihood of a Philippine upgrade for a while and investors are be bullish on Philippine credits, leading to discussion about longer-dated issuance from Philippine corporate names.
Yields on the 10-year Philippine treasury bond have fallen by 105 basis points (bp) year to date, according to data from the Asian Development Bank, to 3.1% at the time of going to press.
This is amid a positive upgrade trajectory from all three ratings agencies, which saw a Fitch upgrade to ‘BB+’ in June 2011, followed by a Standard & Poor’s upgrade to ‘BB+’ in July last year. Moody’s followed suit, upgrading the country’s long-term rating to ‘Ba1’ last October.
In February this year it was rumoured that Fitch had sent an assessment team to Manila to consider a possible ratings upgrade, following suggestions from president Benigno Aquino and finance secretary Cesar Purisima and that an upgrade was well overdue.
Pros and cons
“The Philippine economy has been resilient, expanding 6.6% in 2012 amid a weak global economic backdrop. Strong domestic demand drove this outturn. Fitch expects GDP growth of 5.5% in 2013. The Philippines has experienced stronger and less volatile growth than its 'BBB' peers over the past five years,” said McNicholas, in his comment accompanying the upgrade release.
In addition, improvements in fiscal management mean that general government debt dynamics are more resilient to shocks.
“Strong economic growth and moderate budget deficits have brought the general government debt to GDP ratio in line with the 'BBB' median,” said McNicholas. In addition he championed the sovereign’s attempt to term out its debt profile.
“The sovereign has taken advantage of generally favourable funding conditions to lengthen the average maturity of general government debt to 10.7 years by end-2012 from 6.6 years at end-2008. The foreign currency share of general government debt has fallen to 47% from 53% over the same period.”
Other conditions that spurred the upgrade include a strong inflation management track record from the Philippine central bank and proactive macro-prudential measures.
Negatives include lower governance standards than other ‘BBB’ rated corporates, but reform remains a key part of President Benigno Aquino’s policy efforts. The average income is low and the country’s level of human development is less than other similarly rated peers. Furthermore, the country had a low fiscal revenue take of 18.3% of GDP last year, versus the ‘BBB’ range median of 32.3%
“This limits the fiscal scope to achieve the government's ambition of raising public investment. The recent introduction of a “sin tax”, against stiff political opposition, will likely lead to some increment in revenues and underlines the administration's commitment to strengthening the revenue base,” said McNicholas.