(S&P upgrade) Philippines gets 2nd investment grade rating

Just a month after the Philippines received its first-ever investment grade rating from Fitch Ratings, another credit rating agency gave the country its stamp of approval by bestowing upon the Philippines a BBB- rating, equivalent to a lower medium investment grade.

Standard & Poor’s (S&P), one of the top three credit rating agencies in the world, upgraded the Philippines’ long-term foreign currency- denominated debt from BB+ to BBB-, with a stable outlook. (See definitions of the credit ratings in the article “Moody’s, Fitch, and S&P and what their credit ratings mean“)

BBB- rating with a stable outlook

A BBB- rating signifies “adequate capacity of the debtor to meet financial obligations, although adverse conditions or changing circumstances may lead to a weakened capacity to meet financial commitments.”

A BBB- rating is considered the first level in investment grade rating.

“The upgrade on the Philippines reflects a strengthening external profile, moderating inflation, and the government’s declining reliance on foreign currency debt,” S&P said in its statement explaining the decision.

S&P statement on credit rating upgrade

More justifications for the country’s ratings upgrade, from the S&P statement, is as follows:

“The current and previous administrations improved fiscal flexibility through restraining expenditures, reducing the share of foreign currency debt, deepening domestic capital markets, and more recently through modest revenue gains.

The Philippines has built a substantial foreign exchange reserve buffer through having a long record of current account surpluses, along with modest net foreign direct investments (FDI) inflows and net portfolio equity inflows. The buffer makes for low refinancing risk and an import cover ratio well above prudential norms.

We expect continued remittance inflows from a large emigrant labor force along with an expanding business process outsourcing (BPO) industry to keep the current account in surplus over the next several years. Remittances and the BPO sector combined generate foreign exchange earnings of approximately 15% of GDP, comfortably covering trade deficits of 6%-9% of GDP.

The Philippines’ improved inflation environment is also a rating support. Despite some shortcomings in monetary policy transmission, inflation is low and fairly stable, helped partly by currency appreciation.

The stable rating outlook balances the policy flexibility afforded by current account surpluses and low deficits and inflation against the difficulties of alleviating numerous structural impediments to higher growth.

We may raise the ratings on evidence of government revenue reforms that facilitate needed improvements in physical and human capital, and institutional and structural reforms that boost private sector investment, including FDI.

Conversely, we may lower the ratings if the Philippines’ external performance weakens significantly, external inflows prove difficult to manage and spur overheating in the economy that contributes to banking pressures.”

What the credit rating upgrade means

On March 27, Fitch Ratings became the first ratings agency to give the Philippines an investment grade rating.

Now that the country has earned two investment grade ratings, the Philippines is expected to incur lower cost of debt and higher capital inflows.

A higher credit rating strengthens the Philippines credit standing, signifying lower risk of sovereign default. The Philippines may now borrow from creditors at lower interest rates compared to before. Lower cost of capital translates to government savings that can now be allotted to infrastructure, education, or social services, among others.

Higher capital inflows is expected because foreign funds, such as pension funds and institutional funds, are waiting for a second affirmation of the country’s credit upgrade before finally deciding to invest in the Philippines. Several large-scale investment funds are restricted by their prospectus from investing in countries without two investment grade ratings. Now with two investment grade ratings — one from Fitch and another from S&P — these funds may now be expected to flock to the Philippines’ capital markets.

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