The Philippines is now investment grade.
The news that everyone in the financial markets has been waiting for is finally here. Fitch Ratings announced today that it is upgrading the Philippines’ long-term foreign currency bond rating from BB+ to BBB-, the first notch in investment grade ratings.
The country’s long-term local currency issuer default rating (local currency bonds) has also been upgraded to BBB from BBB-.
The outlook on both bonds is “stable,” meaning Fitch Ratings sees the Philippines’ positive fiscal and economic fundamentals to continue in the short- to mid-term.
What a BBB- rating means
The technical definition of a BBB- rating is that the bond issuer has “adequate capacity to meet financial obligations although adverse conditions or changing circumstances may exist to lead to a weakened capacity to meet financial commitments.”
Other countries with a BBB- rating from Fitch include India, Indonesia, Turkey, Uruguay, Colombia, and six more countries.
A more detailed discussion of credit ratings and comparison of ratings by Fitch Ratings, moody’s and Standard and Poor’s can be found in the article Credit Ratings by S&P, Moody’s, and Fitch Ratings.
Reasons for the credit rating upgrade
According to Fitch Ratings, the upgrade is brought about by the following factors:
“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.
The Philippine economy has been resilient, expanding 6.6% in 2012 amid a weak global economic backdrop.
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.
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.”
What a credit rating upgrade means
Simply speaking, a credit rating upgrade translates to a lower cost of borrowing for the Philippines. The country can now borrow funds from creditors at lower interest rates — leading to lower interest payments that would generate more savings for the government and, ultimately, more cash that can be used for government spending. It could also lead to additional inflow of foreign funds that may be enticed to invest in the Philippines because of the higher credit rating.
We will post another article explaining the detailed impact of the ratings upgrade to the Philippines. For now, the impact would be the reverse of a credit rating downgrade. To compare the effects of a ratings downgrade and upgrade, read our articles Impact of the U.S. credit ratings downgrade and The “Greek Debt Crisis” explained.
PSE stocks surge to new all-time high
News of the upgrade sent the Philippine Stock Exchange to a new all-time high in yesterday’s trading.
The index closed today at a record 6,847.47, up 2.74%. With the exception of the Mining and Oil sector (down 0.06%), all sectors ended in positive territory.
Top PSE index gainers today include:
- Ayala Land Inc (ALI) – P32.70, up 5.48%
- SM Investments Corp (SM) – P1,115.00, up 5.29%
- Meralco (MER) – P326.60, up 4.75%
- Universal Robina Corp (URC) – P113.00, up 4.44%
- LT Group (LTG) – P17.84, up 4.33%
- PLDT (TEL) – P2,988.00, up 4.18%
There were two PSE index companies that lost value today: Energy Development Corp (EDC) closed at P6.46, down 2.56% and Globe Telecom (GLO) which closed at P1,200, down 1.64%.
The Philippine stock market is closed on Thursday and Friday in commemoration of the Holy Week holidays. It will reopen on Monday, April 1.
Photo and Article Credits: Bloomberg, ABS-CBN News
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