Philippines hails ratings upgrade of 'sound' economy

The Philippines has received its second rating agency upgrade to investment grade since March, bringing the country in line with the level where bond investors have traded it for some time.

Standard & Poor’s raised its rating on the Republic of the Philippines on Thursday to BBB- from BB+, the crucial cusp between junk and investment grade. Fitch upgraded the Philippines to the same level in March. Moody’s remains one notch below, following an upgrade in October.

“The Philippines is no longer the sick man of Asia,” said Amando Tetangco, Governor of Bangko Sentral ng Pilipinas, the Philippine central bank.

“Look at the structural improvements, the achievements that the economy has made in the past few years. Productivity has been going up. The macroeconomic situation is sound.” He said the government expected the economy to grow by 6 - 7% in 2013, with inflation of 3-4%.

Standard & Poor’s said: “The upgrade on the Philippines reflects a strengthening external profile, moderating inflation, and the government’s declining reliance on foreign currency debt.” It expects the country to move to a near-balanced external position, with remittances from Filipinos working abroad more than offsetting trade deficits.

The upgrade follows long-standing calls by the Aquino government, and in particular Secretary of Finance Cesar Purisima, for an upgrade, as the country has long argued its fiscal progress and economic attraction mirrored that of Indonesia, which was upgraded to investment grade by two rating agencies (but not S&P) last year.

The upgrade of the Philippines came on the same day that Standard & Poor’s downgraded its outlook for Indonesia from BB+ positive to stable.

Economists argued that the second upgrade would not make a major difference to the Philippines. “It’s the second upgrade in two months, so the cat is out of the bag, “ says Frederic Neumann, co-head of Asian economic research at HSBC. “The first upgrade was much more important, and it was in the price.”

INCREASED FDI?

He said Philippine bonds had already been trading in investment grade territory, although the new upgrade may help Philippine corporates to borrow more cheaply offshore.

“The irony is, in this day and age, there is so much liquidity around the world that for small emerging markets the rating doesn’t matter anymore,” said Neumann. “They can borrow as cheaply offshore as they ever could before. The upgrade helps sentiment but it’s not the dramatic change it once was.”

But Tetangco said the upgrades would lead to increased foreign direct investment. Net FDI was $2.8 billion in 2012, and he expected that to rise to $3.1 billion in 2013, he said.

The Philippines’ key indicators are notably improved – foreign currency debt at 36% of GDP compared to 50% a decade ago, foreign exchange reserves equivalent to 11 months of current account payments, low and stable inflation.

But the country still faces challenges. S&P highlighted low per capita GDP at a projected $2,850 in 2013, infrastructure shortfalls, and restrictions on foreign ownership.

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Although fiscal consolidation has improved the Philippines’ debt burden, it still creates interest costs equivalent to 13% of general government revenues, “well above that seen for rated peers,” according to the rating agency.

One knock-on effect could be increased capital flows, but Tetangco said he had “more tools at our disposal” to deal with them. “We don’t just rely on interest rates these days,” the central bank head said.

But he added: “The challenge really is that while inflows are rising, we need to be able to transform them into financing to increase the absorptive capacity of the economy.”

Despite the upgrade, Tetangco said there would be no international bond issuance from the Philippines in 2013, with any needs being met domestically in the peso market.

- Read an article on capital flows by Amando Tetangco, governor of the Philippines central bank, in the print edition of Emerging Markets on May 4, distributed at the ADB meeting in Delhi, and online on the same day. 

- Follow us on twitter @emrgingmarkets