S&P upgrades RP rating from negative to stable

Ratings agency Standard & Poor’s upgraded yesterday its outlook on Philippine government debt from negative to stable which analysts said would lead to further gains for its sovereign debt, already one of Asia’s best-performing dollar bond markets.

The S&P move does not signal any imminent change in the country’s BB-plus long-term rating and matches similar action by rival rating agency Moody’s Investors Service two months ago.

Both agencies cited a better outlook on government finances for the improving outlook, with President Arroyo’s administration praised by S&P for its tight budget management.

Finance Secretary Jose Isidro Camacho said S &P’s upgrade vindicated the belief of the Arroyo Administration that its economic program is finally bearing fruits.

"(These fruits) will provide us a very strong platform for further growth this year and the years to come," Camacho said. "We believe that the credit story for the Philippines has improved significantly and it is appropriate that our outlook be improved by the credit rating agencies," he added.

Benchmark Philippine 2010 sovereign bonds firmed three basis points on the news but the stock market and the peso currency were largely unmoved.

Traders said the upgrade was largely priced in because of Moody’s earlier move, but it is another sliver of good news for the Philippines, which largely rode out last year’s global downturn and looks well on the road to recovery.

The stock market is up over 20 percent so far this year, the peso S&P upgrades is stable at about 51 to the dollar and data released on yesterday showed that an ongoing slide in exports slowed considerably in February.

The 2010 dollar bond is trading at about 333 bps over comparable US Treasuries, halving the spread from 680 bps five months ago.

Bangko Sentral ng Pilipinas (BSP) Governor Rafael Buenaventura said the upgraded S&P outlook would ignite more interest in the country’s bond issues.

"I think this affirms what the market was anticipating and what was reflective in our bond prices," Buenaventura said, adding the official notification of the upgrade will now induce other investors to take interest in Philippine bonds.

The 2010 bond has slimmed the gap to US Treasuries by around 80 bps so far this year, delivering returns of around 7.5 percent to investors.

According to the J.P. Morgan Asia Credit Index, they are one of the best performing dollar bonds in Asia.

Dealers said Philippine bonds were well bid on Thursday after the S&P announcement, with the market using it as a reason to buy despite the agency only playing catch-up with Moody’s.

"It’s the one must-own sovereign in the region and there is still scope for spread compression," said David Fernandez, head of Asian Sovereign Research at JPMorgan.

S&P said the Arroyo government re-established investor confidence during a difficult year for the global economy and has set the stage for better fiscal and GDP growth performance in coming years.

"The improvement in economic management raises prospects for timely implementation of structural reform, especially in the energy and banking sectors," S&P’s credit analyst Joydeep Mukherji said in a statement.

After years of runaway budget deficits, the government capped its 2001 fiscal deficit at P147 billion, just over a target of P145 billion.

However, S&P added that the foreign currency credit rating will stay below investment grade – BBB – without a substantial improvement in its fiscal profile and external liquidity.

Other issuers may benefit

The country does not immediately plan any more sovereign issues this year after having already floated some $1.8 billion worth of paper in January and March.

But market sources have said state-owned National Power Corp may tap the market for some $750 million later in the year.

Telecoms giant Philippine Long Distance Telephone Co. (PLDT) is also considering a $500 million bond issue but said earlier on Thursday that it had not yet made up its mind.

Jojo Gonzales, research head at Philippine Equity Partners, said the latest outlook upgrade could be slightly beneficial for pricing of the phone company’s bonds, which are seen likely to come to market fairly soon.

"It will help on the margin, but Globe will be more relevant to them," he told Reuters.

Mobile phone operator Globe Telecommunications floated $200 million of 9.75 percent 10-year senior notes last week at a spread of 442 points.

Standard & Poor’s said the Philippine administration had reignited the momentum behind structural reform since Arroyo assumed office in early 2001, and had reestablished investor confidence during a difficult year for the global economy. – With Reuters