The Philippines Gets A Ratings Upgrade

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Fitch Ratings has broken rank with its two fellow ratings agencies and upgraded the Philippines’ sovereign rating to investment grade for the first time, citing the resilience of the domestic economy, improved fiscal management and prudent monetary policy.


The Philippine stock index surged to a record high on Wednesday following the long-awaited ratings action, which is expected to precipitate similar moves by the other major debt watchers in the coming months.


“The Philippines’ sovereign external balance sheet is considered strong relative to A-range peers, let alone BB and BBB category medians,” Fitch said in a note explaining the reasons for the ratings action. “The Philippines has experienced stronger and less volatile growth than its BBB peers over the past five years.”


Fitch raised the Philippines’ long-term foreign currency issuer default rating (IDR) to BBB- from BB+ and upgraded the Asia Pacific country’s long-term local currency IDR to BBB from BBB-, with stable outlooks for both ratings.


It also upgraded the Philippines’ country ceiling to BBB from BBB-, and short-term foreign currency IDR to F3 from B.


Credit Suisse analysts have said since last year that they expected ratings agencies to upgrade the country to investment grade this year, with Fitch likely to move first.


Fitch said the Philippine economy had shrugged off the global economic downturn, expanding 6.6 percent in 2012 thanks to a persistent current account surplus and robust remittance flows from its large population of overseas workers.


Fitch expects the Philippine economy to grow 5.5 percent in 2013, slower than last year and below the consensus estimate of 5.9 percent, but still much faster than many other economies in the world.


Earlier this month, Credit Suisse revised the country’s growth forecast upward to 6.6 percent from 5.9 percent, citing expected upticks in government and private investment.


Among the other reasons Fitch highlighted for its ratings action were improvements in fiscal management started under former President Gloria Arroyo, who served between 2001 and 2010, that “have made general government debt dynamics more resilient to shocks.”


“Strong economic growth and moderate budget deficits have brought the general government debt/GDP ratio in line with the BBB median,” Fitch said.


Fitch also praised the central bank’s economic management skills, noting it had kept inflation in line with BBB peers on average for the past five years and limited the “potential emergence of macroeconomic and financial imbalances.”


But Credit Suisse noted that the Fitch upgrade would likely lead to more capital inflows into the country, which could push up the value of the peso and complicate the central bank’s efforts to control inflation.


Analysts predicted that Standard & Poor’s and Moody’s would follow Fitch’s lead and upgrade the Philippines in the coming months, potentially drawing even more speculative funds to the country.


“We note that for funds which can only invest in investment-grade credit, two of the big three rating agencies are required to have the country upgraded to investment-grade status before they can invest in the country,” Credit Suisse analysts wrote in a note shortly after the upgrade. “As such, we expect more capital inflows into bonds and credit should S&P and/or Moody’s upgrade the country to investment-grade status, which we expect to happen over the next few months.”


That could force the central bank to cut interest rates even further, analysts said.