Another credit ratings agency affirmed yesterday the country’s investment grade status by upgrading the Philippines’ sovereign credit rating one more notch.
Moody’s Investor Services, one of the three largest credit ratings agencies in the world, now rates the Philippines a Baa2 — signifying “adequate capacity to meet financial obligations although there still exists adverse conditions that could lead to a weakened capacity to meet financial commitments”.
A Baa2 rating is two notches above junk status. Sovereign bonds rated junk carry more risks of default which ultimately make the cost of borrowing more expensive. An investment-grade sovereign debt, meanwhile, carries lower interest due to reduced risk, giving more savings to a government that would no longer pay additional interest on the issued debt.
The outlook is “stable” which means the country’s favorable condition is likely to continue at least in the short-term.
In announcing the upgrade, Moody’s cited these three factors as primary drivers in the decision:
1. The Philippines’ level of debt continues to fall, aided by improvements in fiscal management. Data from the Bangko Sentral ng Pilipinas (BSP) shows that in 2003, the government debt reached a high of 68.1% of GDP. This had consistently dropped and improved to 37.3% as of June 2014.
2. The country has favorable prospects for strong economic growth. Despite recording a surprisingly low 5.3% GDP growth in the previous quarter, the Philippines is still one of very few countries with above average growths amid recessions in Europe and Japan. The Euro area’s GDP was a mere 0.2% in the third quarter of 2014, while Japan’s economy did not grow at all, even shrinking 1.9% from July to September 2014,
3. There is limited vulnerability to external risks from other markets, as seen in a resilient economy despite a generally gloomy outlook in other developed and developing markets.
Moody’s, in its upgrade announcement, cited the efforts of the country in further reducing overall debt and in increasing tax revenues.
“Administrative reforms in the key revenue-collecting agencies – most recently in the Bureau of Customs – have led to revenue growth in excess of nominal GDP growth for a fourth consecutive year,” according to Moody’s.
For a detailed explanation of how a credit ratings upgrade can benefit the Philippines and the Filipino public, read our article on the Benefits of a Credit Ratings Upgrade.
For a comparative look at the credit ratings used by Moody’s and the two other rating agencies, Standard & Poor’s and Fitch Ratings, check out this table below.