MANILA, Philippines — The Philippines is on a roll.
After being given bullish growth outlooks from various institutions and getting its first investment grade from Fitch Ratings, another international credit-rating agency placed the country, on Thursday, in the investment status.
Standard & Poor’s announced in a statement that it has raised the country’s credit rating by a notch from BB+ to BBB-, the minimum investment grade, citing the country’s rosy macroeconomic fundamentals in the wake of global economic problems.
S&P assigned a “stable” outlook on the country’s new rating, which means this is likely to remain the same at least over the short term unless unexpected developments that could significantly change the country’s macroeconomic indicators happen.
A credit rating is used by foreign investors in making investment decisions. An investment grade signals to the investors that a country is a place suitable for business, and that its government and private enterprises in general have the ability to service debts to bond and equity investors.
“The upgrade on the Philippines reflects a strengthening external profile, moderating inflation, and the government’s declining reliance on foreign currency debt,” S&P credit analyst Agost Benard said in the statement.
S&P’s move to raise the country’s credit rating came after its decision last month to upgrade its economic-growth projection for the Philippines for 2013 from 5.9 to 6.5 percent.
The improvement in the credit rating and growth estimate for the Philippines come as global economic problems, led by the euro zone crisis, are dampening outlooks on many countries.
For instance, while S&P upgraded its credit assessment for the Philippines, it also announced on Thursday that it lowered its outlook on the BB+ rating of Indonesia from “positive” (which indicates likelihood of an upgrade of the credit rating) to “stable” amid drag caused by unfavorable external environment. A rating of BB+ is a notch below investment grade.
S&P said the Philippines’ “external profile,” or ability to pay its debts to foreign creditors as these fall due, has strengthened as evidenced by the country’s foreign-exchange reserves. These reserves, which currently stand at about $84 billion, are driven largely by remittances from overseas-based Filipinos, foreign investments in business process outsourcing sector (which includes the call centers), and foreign investments in peso-denominated securities.
The foreign exchange reserves of the Philippines are enough to pay for about one year worth of the country’s import requirements, thus exceeding international standards for adequacy. According to benchmarks, reserves must be worth at least four months of a country’s import requirements to be considered comfortable.
Given the enormous foreign exchange reserves managed by the Bangko Sentral ng Pilipinas and other foreign-exchange liquidity kept in banks in the country,the Philippines is not dependent on the international capital market for its dollar requirements, according to the S & P.
The foreign exchange reserves also exceed the total outstanding, short-term debts of government and private entities in the country. According to the BSP, these short-term debts currently stand at about $60 billion.
S&P likewise cited benign inflation, which is believed to help encourage households to consume more and enterprises to buy more capital goods for investments. A low-inflation environment is thus favorable for businesses, according to economists.
In the first quarter, inflation averaged at 3.2 percent, which was close to the low end of the government’s official inflation target range of 3 to 5 percent.
The credit-rating firm likewise noted the Philippine government’s declining debt burden, which was attributed to efforts for nearly a decade to improve tax collection and the country’s growing economy.
After hitting a peak of 74 percent in 2004, the ratio of the government’s outstanding debt to the country’s gross domestic product (GDP) continually declined to reach about 50 percent by the end of 2012 and is projected by S&P to fall further to 47 percent by the end of 2013.
“The current and previous administrations improved fiscal flexibility through restraining expenditures, reducing the share of foreign currency debt, deepening domestic capital markets, and more recently through modest revenue gains,” S&P said.
The credit-rating agency, nonetheless, cited a major weakness of the Philippine economy—the low per-capita income—which it said the government should focus on addressing.
S&P estimated that the country’s per-capita income (the economy’s total income divided by the population), estimated to settle at $2,850 this year, is below those seen in most countries with the same credit rating as the Philippines.
“The Philippine economy’s low income level remains a key rating constraint. The concentrated nature of the economy, infrastructure shortfalls, and restrictions on foreign ownership, which deter foreign investment, are factors that hamper growth,” S&P said.
The Philippines, together with other developing Asian countries, is often described by economists as suffering from “non-inclusive growth” in that while its economy is growing robustly, this is so far unable to lift poor people above the poverty line.
S&P said the country should generate more investments in order to provide jobs to people in the low-income segment and lift the per-capita income. To generate investments, it said, the country has to liberalize its regulatory environment in a manner that allows easier entry of foreign investors. It also said the country has to invest more in infrastructure, which businesses need for easier transportation of goods.
The credit-rating firm, nonetheless, saw a good chance for the Philippines to increase per-capita income over the medium to long term, especially if the country would address infrastructure and regulatory problems.
“Real GDP per capita growth averaged 3.3% over the past decade — somewhat slow at this stage in the country’s development. Based on ongoing structural changes in the economy, rising private sector investment, and with increased fiscal space allowing greater public spending, we expect real GDP per capita growth to rise to 4.5% in the forecast period to 2016,” it said.
Meantime, BSP Governor Amando Tetangco Jr. said the investment ratings from Fitch and S&P would further lift investor sentiment on the Philippines. He said the favorable sentiment would translate into actual investments over the short to medium term, and make the Philippines catch up with its Southeast Asian neighbors in terms of foreign direct investments.
“With our investment grade rating, we are more confident that these inflows, particularly of more FDIs, will swing towards increasing the country’s productive capacity, thereby generating more employment and higher incomes,” Tetangco said.
Finance Secretary Cesar Purisima said the investment rating from Fitch and S&P reflected economic gains from reform policies of the government. He said the government’s anti-corruption and transparency agenda has made the Philippines win the attention of the international capital markets.
“The investment grade rating is another resounding vote of confidence on the Philippines. Good governance is bringing structurally sustainable growth for the Philippines,” he said.
