Strong growth and progress on reform support PH high credit profile — Moody’s

Singapore-based Moody’s Investors Service announced on Wednesday, August 1, 2018, its recent evaluation of the Philippines’ positive credit profile, identified as BAA2 stable, is supported by a large and fast-growing economy and continued gains in debt affordability because of revenue reforms.

These positive features are balanced against low per capita incomes and low revenue raising capacity when compared with other BAA-rated countries.

BAA2 is the ninth highest rating in Moody’s Long-term Corporate Obligation Rating. Obligations rated BAA2 are subject to moderate credit risk. They are considered medium grade and as such may possess certain speculative characteristics.

Moody’s expects the Philippines’ robust economic growth to be sustained over the next few years, as the government’s focus on infrastructure development reinforces the decade-long trend of increasing potential growth.

Strong domestic demand and the economy’s limited reliance on foreign sources of financing shield the Philippines from the direct impact of abrupt changes in the global macroeconomic and financial environment.

Moody’s conclusions are contained in its just-released credit analysis titled “Government of the Philippines — BAA2 Stable,” which examines the sovereign in four categories: economic strength, which Moody’s assesses as “high”; institutional strength “moderate (+)”; fiscal strength “moderate”; and susceptibility to event risk “low (+)”.

Moodys said the report constitutes an annual update to investors and is not a rating action.

The stable outlook on the Philippines’ sovereign rating indicates that upside and downside risks are balanced.

Strong GDP growth could accelerate even further, especially if the government achieves higher spending on infrastructure. Moody’s also expects further progress on improving government revenue on the back of additional reforms and ongoing enhancements in tax administration, which would also help keep government debt stable.

On the downside, policymakers face challenges in managing current inflationary pressures. Nevertheless, Moody’s expects the rise in prices since the beginning of 2018 to be temporary and not as a result of excessive overheating risks. Moody’s also believes that the strong track record of the central bank in maintaining monetary and financial stability will prevail in the face of such headwinds.

Moody’s would likely upgrade the sovereign’s rating if there is a marked convergence of per capita incomes and revenue generation — and with it, improved debt affordability — with higher-rated peers. Such a situation could materialize over time through continued progress on the government’s reform agenda, while policymakers avoid a build-up of inflationary pressures.

Conversely, Moody’s could downgrade the sovereign rating if macroeconomic stability were to be threatened by unabated overheating pressures, leading to a deterioration in fiscal and government debt metrics and an erosion of the country’s external payments position.

The reversal of reforms that have supported recent gains in economic and fiscal strength, and/or the implementation of prospective changes in governance structures in a way that diminishes fiscal strength would also likely lead to a rating downgrade.

Malacañang welcomed this positive outlook of Moody’s Investors Service on the Philippine economy.

“We welcome the positive outlook of Moody’s Investors, stating that the Philippines is expected to sustain its robust economic growth over the next few years,” Presidential Spokesperson Harry Roque said.

Roque said Moody’s has attributed the country’s economic growth to the government’s focus on what has been touted as “the golden age” of infrastructure development.

“This only goes to show that our ‘Build, Build, Build’ program continues to provide favorable results for the country,” Sec. Roque said.

According to the Department of Budget and Management, the government’s infrastructure spending from January to June 2018 reported an increase of 41.6 percent to PHP352.7 billion compared to last year’s PHP249.1 billion during the same period.

Moody’s Investors Service, often referred to as Moody’s, is the bond credit rating business of Moody’s Corporation in Singapore, representing the company’s traditional line of business and its historical name. Moody’s Investors Service provides international financial research on bonds issued by commercial and government entities.