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By Bettina Faye V. Roc, Senior Reporter

Surprise upgrade issued by S&P

Posted on May 09, 2014

THE PHILIPPINES’ credit score has been upgraded a notch further into investment grade by Standard & Poor’s -- the country’s best showing so far -- on the back of strong economic fundamentals and expectations of lasting reforms.

S&P yesterday raised its rating to BBB with a stable outlook, from the BBB-, also with a stable outlook, issued a year ago. At a notch above the lowest investment grade, it is the highest the Philippines has scored to date and was a surprise as the debt watcher did not first upgrade its outlook to positive.

"We raised the ratings because we now believe the ongoing reforms to address shortcomings in structural, administrative, institutional, and governance areas will endure beyond the current administration," S&P said in a statement.

It said that while the upcoming 2016 presidential elections presented uncertainty, a reversal of the reform gains achieved so far seems unlikely and the challenge has shifted towards "maintaining the impetus and direction."

"In turn, we believe the resulting gains in government revenue generation, spending efficiency, and the improvements in public debt profile and investment environment will at least be preserved in the medium term under the next administration," S&P noted.

The higher rating, it said, reflects the country’s strong macroeconomic position, as evidenced by its strong external position -- an "important credit support" -- as it gives the country a buffer against external shocks.

"We expect that remittances and service exports of the business process outsourcing industry will continue to generate foreign exchange earnings that more than offset trade deficits of 6%-9% of GDP ... Accordingly, we forecast that the country’s current account will remain in surplus..."

The economy is likewise supported by a monetary policy framework that has kept inflation low, stable, and well-anchored.

The debt watcher noted, however, that the Philippines has a relatively low income level, underscored by the high unemployment and underemployment.

"While structural changes have boosted the trend growth for real per capita GDP to an estimated 4.3% in 2014, compared with 3.2% five years ago, numerous impediments to growth remain. We project that the economy’s low income and associated vulnerabilities will remain a rating constraint in the medium term," it said.

"However, taking into account remittances, the Philippines’ gross national product is about a third higher than its GDP. On that measure, the country’s payment capacity would be greater, particularly when the remittances are as durable as they have been," it added.

The government’s ability to generate funds to support the economy’s expansion is also limited by its narrow tax base and high levels of non-compliance, the debt watcher noted.

"In addition, a shortage of basic infrastructure and public services constrains Philippines’ fiscal flexibility and growth prospects."

S&P recognized, however, that administrative measures aimed at boosting collection efficiency and reducing tax evasion were underway, which has led to continued improvements in collections over the past years.

"We expect the ongoing revenue reform program will yield revenue growth of an average of 0.5% of GDP per year, allowing greater public spending while adhering to a path of fiscal consolidation," it said.

According to S&P, the "stable" outlook it gave along with the rating reflected expectations that the economy’s fundamentals would continue to improve, and indicates that a ratings change is unlikely this year or the next.

It expects "slow progress in raising per capita wealth and alleviating numerous structural impediments to higher growth."

"We may raise the ratings if ... reforms lead to an improved investment environment and increased growth potential, or if ongoing changes in governance and the policy environment lead us to a better assessment of institutional and governance effectiveness," it noted.

"On the other hand, we may lower the ratings if the administration’s reform agenda stalls or if a successor administration pursues policies that reverse the improving trajectory of the Philippines’ fiscal or external positions."

Economic managers yesterday welcomed the news of the upgrade, saying it lends credence to the government’s reform agenda.

"This is a major feat as S&P did a straight upgrade. They no longer assigned a positive outlook before upgrading the rating," Bangko Sentral ng Pilipinas (BSP) Governor Amando M. Tetangco, Jr. said in a statement.

"Since S&P raised the Philippines’ credit rating to investment grade in May 2013, the Philippines proved that it is able to sustain high economic growth despite external volatility and in the case of last year - successive domestic natural disasters...," he added.

"This rating upgrade is also a recognition that the structural reforms that we have put in place continue to gain traction, as demonstrated by the significant improvements in the country’s position in international governance and competitiveness surveys."

Budget Secretary Florencio B. Abad called the upgrade "an affirmation ... of creditors’ and investors’ belief in the Philippines’ adequate capacity to meet its financial commitments -- even in the face of improving but continuing uncertainty in the global markets."

"[I]t validates the observation ... that our macroeconomic position remains solid and economic growth will continue to be robust."

Finance Secretary Cesar V. Purisima said: "This is further proof of President [Benigno S. C.] Aquino’s belief that good governance is good economics."

Mr. Tetangco added that the BSP would continue to support the economy amid a low-inflation environment.

"We stand ready to adjust our monetary policy stance and adopt macroprudential measures, as appropriate, to guard against risks that would unsettle inflation expectations and threaten the soundness of our financial system. We will also continue to craft external sector policies that will help keep our external liquidity position strong," he said.