Singapore, July 23, 2009 -- Moody's Investors Service has upgraded the Philippines' foreign and local currency government ratings to Ba3 from B1, the country ceiling for foreign currency bank deposits to Ba3 from B1 and the country ceiling for foreign currency bonds to Ba1 from Ba3. The change in the foreign currency bond ceiling is based on a revised assessment of the risk of an external payments moratorium to low from moderate.
The outlook on the ratings is stable.
The upgrade was prompted by the relatively high degree of resiliency exhibited by both the country's financial system and external payments position in face of the global financial and economic crises. International reserves of the central bank are at a historical high and exceptional policy measures have not been required to shield the banking system from global shocks.
"At the same time, Moody's notes that pressures have risen on the budget and are more severe than had been originally expected this year by the government but, at the same time, the larger fiscal deficit should be finance-able from domestic and foreign funding sources," says Tom Byrne, a Moody's Senior Vice President.
"The re-opening of global credit markets this year has also been opportunistically exploited by the Philippines in its effort to minimize both a crowding-out of the domestic markets and a rise in government bond yields," adds Byrne.
Moreover, Moody's notes that the Philippines' larger budget deficit is mainly a result of the collapse in economic activity, a pattern that is evident in other regional and global economies. Moody's expects that economic growth will be gradually restored and, along with that, some pick-up in the government's fiscal revenue performance will help contain the abnormally large deficit.
Furthermore, the rating agency considers that the government's intention to tighten fiscal policy next year and return to a path of fiscal consolidation over the medium term will be crucial for supporting the country's credit fundamentals and for reducing the government's debt overhang, which is greater than those of its Ba3 rating peers.
"Moody's believes that the country's long-term fiscal outlook would improve with more progress in shoring up government revenues, both through tightened administration and the introduction of new tax measures, several of which are pending before Congress," says Byrne. "In addition, while expenditure control has improved in recent years and Treasury debt management has been skilful, these measures alone will not ensure fiscal sustainability."
Moody's also considers that a stable peso is crucial for containing budgetary debt service payments — about half of public-sector debt is denominated in foreign currencies — and so allow for budgetary resources to be channeled into infrastructure programs and fiscal stimulus measures. The absence of volatility in the peso reflects the resiliency of the balance-of-payments to the global crisis.
"In addition, the current steady deceleration in and the likely containment of inflation within Bangko Sentral's 2.5-4.5% formal targeting range should help ease pressure on the exchange rate this year, and so provide the central bank with scope to maintain an accommodative monetary policy to cushion the effects of the global recession," says Byrne.
"For the Philippines' rating to move upwards, Moody's will assess prospects for the continued resiliency of the country's balance of payments, the health of the financial system, and progress towards the achievement of the new, fiscal consolidation goal by 2013. All these will likely require policy prudence and additional fiscal reform. Moreover, continued improvement in the investment environment will be required to place the economy on a path of strong, sustainable growth," says Byrne.
In the current environment, a key concern will be the resiliency of exports of both manufactures and services, as well as inflows of overseas worker remittances. Moody's noted that earlier concerns that remittance inflows would collapse have not played out. To the contrary, such inflows may eke out a small gain this year from last year's level which amounted to about 20% of current account receipts and 10% of GDP.
On the other hand, downward pressure on the rating would arise from an inability to improve government finances as the global economy recovers or from a structural weakening in the balance of payments.
The last rating action on Philippines was taken on 12 February 2009, when Moody's affirmed the positive outlook on the government of the Philippines' B1 rating.
The principal methodology used in rating the government of the Philippines is Moody's Sovereign Bond Methodology, which can be found at www.moodys.com in the Credit Policy & Methodologies directory, in the Ratings Methodologies subdirectory. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Credit Policy & Methodologies directory on Moody's website.
Singapore
Thomas J. Byrne
Senior Vice President - Regional Credit Officer
Sovereign Risk Group
Moody's Singapore Pte Ltd.
JOURNALISTS: (852) 2916-1150
SUBSCRIBERS: (65) 6398-8308
Singapore
Aninda S. Mitra
Vice President - Senior Analyst
Sovereign Risk Group
Moody's Singapore Pte Ltd.
JOURNALISTS: (852) 2916-1150
SUBSCRIBERS: (65) 6398-8308
London
Pierre Cailleteau
Managing Director
Sovereign Risk Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
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