Moody's: Philippines' Sovereign Rating Bolstered by Macro Stability, Depth of Local Bond Market

The Philippines' Baa3 government bond rating and positive outlook reflect the country's robust growth performance against the backdrop of macroeconomic stability, as well as ongoing fiscal and debt consolidation, says Moody's Investors Service.


The Philippines' current account surplus and strong domestic demand for its government bonds provide a strong buffer against external financial shocks, such as prospective tapering of the US Federal Reserve's quantitative easing program.


Moody's reports that the Philippines' high growth in recent years has been accompanied by an increasingly solid record of inflation performance, bolstering assessments of economic and institutional strength. Credit support also comes from narrow fiscal deficits and a declining debt burden.


The positive rating outlook reflects Moody's expectation that prevailing economic and fiscal trends will continue over the next one to two years, and that the Philippines' healthy external position is likely to remain intact.


Foreign exchange reserves exceed external debt, while the current account continues to be bolstered by remittance inflows from overseas Filipinos and services exports, particularly from the business process outsourcing sector.


However, credit challenges include low per capita income and fiscal revenue mobilization.


Moody's report says that among investment grade countries, only India has a lower per capita GDP.


Nonetheless, while the Philippines' revenue base is narrow, and revenue to GDP is relatively low, gains from more efficient tax administration have allowed for large increases in infrastructure spending.


At the same time, the relatively high proportion of government debt denominated in foreign currency renders the Philippines more susceptible to currency risks as compared to other investment grade countries.


In addition, the favorable political backdrop that has facilitated the government's recent track record of policy performance could be threatened by ongoing deliberations related to discretionary spending by politicians or perceptions of an inadequate response to Typhoon Haiyan.


On Typhoon Haiyan, Moody's report notes that economic conditions in the affected regions are likely to deteriorate sharply in the fourth quarter of this year. This development, in turn, poses downside risks to Moody's full-year growth forecast for the Philippines of 7.0%.


Nevertheless, Moody's report also says the government has ample fiscal space to accommodate additional spending for relief and reconstruction. In addition, assistance from the international community will mitigate stresses on the government's fiscal position.


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