FFE Magazine

Q & A on Fitch Ratings announcement declaring the Philippines Investment Grade, March 27, 2013

Q: What does an investment-grade rating mean for the Philippines?

A: This investment-grade rating is a seal of good housekeeping and a resounding vote of confidence in the Philippine economy. It is strong affirmation that the Philippines is on the right path toward sustainable and inclusive growth. It also closes the gap between our market rating and our credit rating. This upgrade was achieved due to sound macroeconomic fundamentals, underpinned by good governance reforms as well as the Philippines’ good economic prospects moving forward.

Q: How will this impact the Philippine economy?

A:  We expect to see an increase in investment inflows, as many institutional investors allow the investment of funds in investment-grade countries only.

The upgrade also means lower costs for government debt, thereby freeing more funds for social services, infrastructure and other long-term investments for economic development. It means cheaper and broader sources of funds for both government and corporate borrowers. Domestic and foreign businesses would be more encouraged to increase investments in the country’s productive capacity such as in the manufacturing industry and in agri-business, thus generating more employment.

Q: What was the basis of Fitch Ratings’ decision? What were the main drivers?

A: According to the press release of Fitch Ratings, the following are the key rating drivers for the upgrade of the Philippines’ sovereign ratings:

- The Philippines’ sovereign external balance sheet is considered strong relative to ‘A’ range peers, let alone ‘BB’ and ‘BBB’ category medians. A persistent current account surplus (CAS), underpinned by remittance inflows, has led to the emergence of a net external creditor position worth 12% of GDP by end-2012, up from 6% at end-2010. Remittance inflows were worth 8% of GDP in 2012 and proved resilient even through the shock of the global financial crisis. Fitch expects a rising import bill stemming from strong domestic demand to lead to a narrower CAS and to stabilise the net external creditor position at a strong level through to 2014.

- The Philippine economy has been resilient, expanding 6.6% in 2012 amid a weak global economic backdrop. Strong domestic demand drove this outturn. Fitch expects GDP growth of 5.5% in 2013. The Philippines has experienced stronger and less volatile growth than its ‘BBB’ peers over the past five years.

- Improvements in fiscal management begun under President Arroyo have made general government debt dynamics more resilient to shocks. Strong economic growth and moderate budget deficits have brought the general government (GG) debt/GDP ratio in line with the ‘BBB’ median. The sovereign has taken advantage of generally favourable funding conditions to lengthen the average maturity of GG debt to 10.7 years by end-2012 from 6.6 years at end-2008. The foreign currency share of GG debt has fallen to 47% from 53% over the same period.

- Favourable macroeconomic outturns have been supported in Fitch’s view by a strong policy-making framework. Bangko Sentral ng Pilipinas’ (BSP) inflation management track record and proactive use of macro-prudential measures to limit the potential emergence of macroeconomic and financial imbalances is supportive of the credit profile. Inflation has been in line with ‘BBB’ peers on average over the past five years.

- Governance standards, as measured in international indices such as the World Bank’s framework, remain weaker than ‘BBB’ range norms but are not inconsistent with a ‘BBB-’ rating as a number of sovereigns in this rating category fare worse than the Philippines. Governance reform has been a centrepiece of the Aquino administration’s policy efforts. Entrenching these reforms by 2016 is a policy priority of the government.

- The Philippines’ average income is low (USD2,600 versus ‘BBB’ range median of USD10,300 in 2012), although this measure does not account directly for the significant support to living standards from remittance inflows. The country’s level of human development (as measured in the United Nations Development Programme’s index) is less of an outlier against ‘BBB’ range peers.

- The Philippines had a low fiscal revenue take of 18.3% of GDP in 2012, compared with a ‘BBB’ range median of 32.3%. This limits the fiscal scope to achieve the government’s ambition of raising public investment. The recent introduction of a “sin tax”, against stiff political opposition, will likely lead to some increment in revenues and underlines the administration’s commitment to strengthening the revenue base.

Q: Moving forward, how do we expect government policy and government action to change in response to the credit rating upgrade?

A:  While we expect an investment grade rating to open new opportunities for the Philippines, it also poses a challenge to all of us to maintain it. Hence, the Philippine government will continue to focus on sustaining the progress that we have achieved both in terms of economic growth and institutionalizing good-governance reforms. We will preserve all the factors that made this investment-grade rating possible—low and stable inflation, favorable interest rates and a sound banking system, a sustainable fiscal position, and a strong external position. Most of all, the platform of good governance which has made such progress possible, will continue and are irreversible. Foreign and local businesses can rely on a government that will continue to be transparent, effective, and responsive.

Credit Ratings Graph (2001 – 2013)

\"CREDIT-RATINGS-updated\"

Supporting Table

Date

Foreign Currency Rating

Local Currency Rating

 

Long-term

Short-term

Outlook

Long-term

Short-term

Outlook

Standard and Poor’s

2 Jul. 1993

BB-

-

Stable

-

-

-

2 Nov. 1994

BB-

-

Positive

BBB

-

Positive

23 Mar. 1995

BB-

-

Positive

BBB

A-2

Positive

30 May 1995

BB-

-

Positive

BBB+

A-2

Positive

21 Feb. 1997

BB+

-

Positive

A-

A-1

Positive

25 Sep.1997

BB+

B

Stable

A-

A-1

Stable

23 Feb. 1998

BB+

B

Negative

BBB+

A-2

Negative

6 Jan. 1999

BB+

B

Stable

BBB+

A-2

Stable

19 Oct. 2000

BB+

B

Negative

BBB+

A-2

Negative

4 Apr. 2002

BB+

B

Stable

BBB+

A-2

Stable

28 Oct. 2002

BB+

B

Negative

BBB+

A-2

Negative

24 Apr. 2003

BB

B

Stable

BBB

A-3

Stable

29 Jul. 2004

BB

B

Stable

BBB-

A-3

Stable

17 Jan. 2005

BB-

B

Stable

BB+

B

Stable

11 Jul. 2005

BB-

B

Negative

BB+

B

Negative

9 Feb. 2006

BB-

B

Stable

BB+

B

Stable

18 May 2007

BB-

B

Stable

BB+

B

Stable

18 Apr. 2008

BB-

B

Stable

BB+

B

Stable

3 Jul. 2009

BB-

B

Stable

BB+

B

Stable

12 Nov. 2010

BB

B

Stable

BB+

B

Stable

29 Jul. 2011

BB

B

Stable

BB+

B

Stable

16 Dec. 2011

BB

B

Positive

BB+

B

Positive

4 Jul. 2012

BB+

B

Stable

BB+

B

Stable

Dec. 2012

BB+

B

Positive

BB+

B

Positive

 

Moody’s Investors Service

11 May 1995

Ba2

-

-

-

-

-

22 Jan. 1997

Ba2

-

RUR1/

-

-

-

7 Mar. 1997

Ba2

-

Positive

-

-

-

18 May 1997

Ba1

-

Stable

-

-

-

4 Sep.1998

Ba1

-

Stable

Baa3

-

-

27 Oct. 2000

Ba1

-

Negative

Baa3

-

-

3 Feb. 2002

Ba1

-

Stable

Baa3

-

Stable

8 Jan.  2003

Ba1

-

Stable

Baa3

-

Negative

29 Sep. 2003

Ba1

-

Negative

Baa3

-

Negative

26 Nov. 2003

Ba1

-

RUR1/

Baa3

-

RUR1/

27 Jan. 2004

Ba2

-

Negative

Ba2

-

Negative

9 Nov. 2004

Ba2

-

RUR1/

Ba2

-

RUR1/

16 Feb. 2005

B1

-

Stable

B1

-

Stable

13 Jul. 2005

B1

-

Negative

B1

-

Negative

2 Nov. 2006

B1

-

Stable

B1

-

Stable

1 Jun. 2007

B1

-

Stable

B1

-

Stable

25 Jan. 2008

B1

-

Positive

B1

-

Positive

21 Jun. 2008

B1

-

Positive

B1

-

Positive

12 Feb. 2009

B1

-

Positive

B1

-

Positive

23 Jul. 2009

Ba3

-

Stable

Ba3

-

Stable

06 Jan. 2011

Ba3

-

Positive

Ba3

-

Positive

15 Jun. 2011

Ba2

-

Stable

Ba2

-

Stable

29 May 2012

Ba2

-

Positive

Ba2

-

Positive

 

Fitch Ratings2/

8 Jul. 1999

BB+

B

-

BBB

-

-

21 Sep. 2000

BB+

B

Stable

BBB

-

Stable

17 Jan. 2001

BB+

B

Rating watch negative

BBB

-

Rating watch negative

15 Mar. 2001

BB+

B

Stable

BBB-

-

Stable

25 Nov. 2002

BB+

B

Negative

BBB-

-

Negative

12 Jun. 2003

BB

B

Stable

BBB-

-

Stable

7 Dec. 2004

BB

B

Negative

BB+

-

Negative

26 May 2005

BB

B

Stable

BB+

-

Stable

11 Jul. 2005

BB

B

Negative

BB+

-

Negative

13 Feb. 2006

BB

B

Stable

BB+

-

Stable

18 Aug. 2006

BB

B

Stable

BB+

-

Stable

5 Mar. 2007

BB

B

Stable

BB+

-

Stable

27 Jun. 2008

BB

B

Stable

BB+

-

Stable

6 May 2009

BB

B

Stable

BB+

-

Stable

9  Aug. 2010

BB

B

Stable

BB+

-

Stable

23 Jun. 2011

BB+

B

Stable

BBB-

-

Stable

19 Jun. 2012

BB+

B

Stable

BBB-

-

Stable

27 Mar 2013

BBB-

B

Stable

BBB

-

Stable

           

gov.ph || 4 April 2013

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