Bloomberg News

Philippines Wins Moody’s Rating Upgrade on Fiscal Progress

June 15, 2011

(Updates with stocks rising in first paragraph.)

June 15 (Bloomberg) -- The Philippines’ debt rating was raised to the highest level since the start of 2005 by Moody’s Investors Service, after the government took steps to reduce its budget deficit. Stocks and the peso rose.

The country’s foreign and local currency long-term bond ratings were increased to Ba2 from Ba3, Moody’s said in a statement today. The outlook is stable. The move brings the country to two levels below investment grade, placing it above Vietnam and lower than Malaysia and Indonesia.

“The government has done a good job during the last year with a better-than-expected control on its budget deficit,” said Jetro Siekkinen, a fund manager in Helsinki at Aktia Asset Management, which owns both peso and dollar bonds sold by the Philippines among $10 billion of assets under management. “The economy is not highly dependent on China. The central bank is doing a good job keeping inflation in check. Things are definitely going in the right direction.”

President Benigno Aquino has gone after tax evaders and smugglers to convince investors he can boost revenue to narrow a record budget shortfall. Higher debt ratings reduce the cost of borrowing, making it cheaper for the Philippines to sell debt to fund spending on roads, bridges and schools.

The decision was driven by “the progress made in fiscal consolidation by the new Aquino administration; and the sustained nature of macroeconomic stability, coupled with continued strength in the external payments position, against a background of a significant pick-up in the momentum for economic growth,” Moody’s said.

Stocks Climb

The country’s benchmark stock index rose 1.5 percent today, ending four days of declines. The peso advanced after the Moody’s decision before trading little changed at 43.35 a dollar as of 12:30 p.m.

The cost of protecting the nation’s debt from default fell 3.5 basis points, or 0.035 percentage point, to 130.50, according to 11:50 a.m. prices at Royal Bank of Scotland. That’s the lowest since May 6. The yield on the 8.125 percent peso debt due December 2035 fell five basis points to 7.95 percent.

“This is a confirmation that the Philippines has cleared the path for growth and what it needs now is a vehicle to race through that road,” said Rico Gomez, who helps manage about $1.5 billion at Manila-based Rizal Commercial Banking Corp. “This could help, but the market needs to see a growth driver for the index to reach a record.”

Standard & Poor’s

Standard & Poor’s in November raised its rating on Philippine debt for the first time since 1997, boosting it to BB, the second-highest non-investment grade. Fitch Ratings rates Philippine debt BB, two levels below investment grade.

The Philippines reported a budget surplus of 26.3 billion pesos ($607 million) in April as revenue rose and spending fell. The surplus was 61 million pesos in the first four months, compared with a deficit of 131.80 billion pesos in the same period in 2010.

The government had a record budget shortfall of 314 billion pesos in 2010. The $161 billion economy expanded 7.6 percent last year.

“The improvement in revenue collection has satisfied the ratings agency,” said Banco de Oro Unibank Inc. market strategist, Jonathan Ravelas. “The government should not, however, rest on its laurels since the fiscal data also highlights the under-spending of the government which is needed to boost growth.”

Policy Credibility

The rating upgrade shows the Philippines “can improve fiscal space without resorting to new revenue measures,” said President Aquino’s spokesman, Ricky Carandang. It will allow the government to borrow at a lower rate, he said.

“While we expect expenditures to increase significantly in the second half of 2011 as the government commences its cornerstone infrastructure investment program, the rise will not likely derail the trend towards fiscal consolidation,” Moody’s said. “By demonstrating firm fiscal restraint, the government has bolstered its policy credibility.”

Still, the government’s “budgetary interest burden and its debt overhang” remain high compared with its peers, the rating company said.

--With assistance from Karl Lester M. Yap and Ian Sayson in Manila, David Yong in Singapore and Cherian Thomas in New Delhi. Editors: Stephanie Phang, Clarissa Batino

To contact the reporter on this story: Cecilia Yap in Manila at cyap19@bloomberg.net

To contact the editors responsible for this story: Stephanie Phang at sphang@bloomberg.net; Rebecca Evans at revans6@bloomberg.net


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