Global Credit Research – 29 May 2012
Singapore, May 29, 2012 — Moody’s Investors Service has today changed the outlook on the Government of the Philippines’ Ba2 rating to positive from stable.
The key drivers for the decision are:
1. Our expectation of continued trend fiscal and debt consolidation; and
2. The enhanced finance-ability of government debt.
In a related rating action, Moody’s also changed the outlook on the Ba2 rating for the country’s central bank, the Bangko Sentral ng Pilipinas (BSP), to positive from stable.
RATINGS RATIONALE FOR THE POSITIVE OUTLOOK
The government of the Philippines has continued to demonstrate prudence in its fiscal management, as characterized by low budget deficits relative to its rating peers and a steadily declining level of debt relative to GDP.
Such outcomes are the result of expenditure restraint and improved revenue performance.
Moreover, despite the absence of legislative reforms, more effective tax administration measures have resulted in revenue growth outpacing nominal GDP growth over the past five quarters. And although spending disbursements have accelerated since late 2011, the up tick in revenues has led to the faster-than-expected consolidation of the country’s deficits and debt burden.
We expect revenue growth to improve further upon the passage of legislation aimed at restructuring excise taxes on alcohol and tobacco products.
Nevertheless, deeper structural reforms may be necessary for revenue mobilization to catch up to levels similar to those of Philippines’ rating peers.
Moody’s considers that active debt management, coupled with the central bank’s increasingly solid track record of inflation management, has allowed for an improvement in the country’s debt structure, including lower average borrowing costs and foreign currency exposure, as well as longer average maturities.
The sovereign’s vulnerability to global financial market shocks has been reduced by the build-up of foreign exchange reserves, resulting in turn from robust current account surpluses and healthy capital inflows in recent years.
Concern over the Philippines’ relatively large stock of debt is mitigated, to some degree, by institutional features, such as automatic appropriations for debt servicing in the budget. In addition, an increasingly large bond sinking fund provides an adequate buffer that guards against near-term liquidity pressures.
At the same time, the economy remains sensitive to external demand, despite its relatively low level of openness to trade. But stable remittance inflows from the country’s large overseas diaspora have supported the balance of payments and domestic household consumption, and have helped keep real GDP growth in positive territory every year for the past decade.
Moody’s also changed to positive the outlook for the Philippines’ Baa3 long-term foreign currency (FC) bond ceiling and its Ba2 long-term FC deposit ceiling. These ceilings act as a cap on ratings that can be assigned to the FC obligations of other entities domiciled in the country.
CREDIT TRIGGERS FOR A FUTURE RATING ACTION
Factors that could lead to a ratings upgrade:
1. Structural improvements in revenue mobilization;
2. Continued reductions in the government debt burden (debt/GDP ratio); and
3. An acceleration of investment spending that places the economy on a path of stronger growth.
These developments should also be accompanied by the continued health of the country’s balance of payments and stability of the financial system.
Although unlikely — given the positive rating outlook — factors that could lead to a change in the outlook to stable, or a negative rating action, include:
1. A destabilization of macroeconomic conditions that could lead to an unmooring of inflation expectations and an adverse effect on financing conditions; and
2. A shift away from the focus on good governance, resulting in turn in a deterioration in the investment climate and, ultimately, revenue performance.
PREVIOUS RATING ACTION & METHODOLOGY USED
Moody’s previous rating action affecting the ratings of the Government of the Philippines and Bangko Sentral ng Pilipinas was taken on 15 June 2011 when these entities’ issuer ratings were upgraded by one notch to Ba2 from Ba3. At the time, the Philippines’ country ceilings for foreign currency bonds and deposits were upgraded by one notch to Baa3 and Ba2, respectively. Also, the country ceilings for local currency bonds and deposits were unified at A2.
The principal methodology used in this rating was Sovereign Bond Ratings published in September 2008. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
REGULATORY DISCLOSURES
The ratings have been disclosed to the rated entities or their designated agent(s) and issued with no amendment resulting from that disclosure.
Moody’s considers the quality of information available on the rated entities, obligations or credits satisfactory for the purposes of issuing these ratings.
Moody’s adopts all necessary measures so that the information it uses in assigning the ratings is of sufficient quality and from sources Moody’s considers to be reliable including, when appropriate, independent third-party sources. However, Moody’s is not an auditor and cannot in every instance independently verify or validate information received in the rating process.
Please see Moody’s Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.
Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history. The date on which some ratings were first released goes back to a time before Moody’s ratings were fully digitized and accurate data may not be available. Consequently, Moody’s provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.
In addition to the information provided below please find on the ratings tab of the issuer page at www.moodys.com, for each of the ratings covered, Moody’s disclosures on the lead rating analyst and the Moody’s legal entity that has issued each of the ratings.
Christian de Guzman
Asst Vice President – Analyst
Sovereign Risk Group
Moody’s Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (65) 6398-8308
Bart Oosterveld
MD – Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Releasing Office:
Moody’s Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (65) 6398-8308
Source: http://www.moodys.com
