Global investment banks bullish on RP

International investment firms Lehman Brothers and Merrill Lynch expect significant improvements in the Philippines’ macroeconomic fundamentals as a result of the fiscal reforms implemented.

Lehman Brothers, in its Global Weekly Economic Monitor released Oct. 6, credited the Philippines for effecting fiscal reforms and yielding the desired results faster than expected. It further noted that the "reforms have reached a critical point where virtuous spirals are developing, lifting investor confidence, which in turn helps improve the fundamentals."

Better fiscal finances have likewise reduced both the government’s funding needs and the risk premium demanded by creditors, leading to a drop in the 91-day Treasury bill rate and reducing government debt-servicing costs, it added.

With these developments, Lehman Brothers expects the gross domestic product (GDP) growth to hit six percent in 2007, within the government’s forecast range of 5.7 to 6.5 percent, and anticipates the continued decline of the country’s consolidated debt-to-GDP ratio from 87 percent in 2005 to 65 percent in 2008.

Further, the investment bank strongly suggested that credit rating agencies should start rewarding the Philippines for its economic achievements.

"Rather than the Philippines falling behind the curve with reforms, we think it is the rating agencies that are now lagging," it cited in its report.

Merrill Lynch, on its second investment visit during the year, affirmed for the third time since December last year, its overweight recommendation on the Philippines, expecting this year’s progress thus far to be capped with a sharply reduced fiscal deficit at 1.3 percent of GDP from 2.1 percent last year. Its outlook for economic growth remains positive in the absence, it believes, of macroeconomic risks in the near term.

"We think that beyond the remarkable fiscal performance, a number of factors will be supportive of the credit, including much reduced bond supply likely to be announced for next year, and a possible positive rating action," the Merrill Lynch report said.

Nonetheless, both banks underscored the importance of maintaining political stability in the face of national elections next year.

"We are happy to observe that investment banks have recognized the progress the country has achieved on the fiscal policy front and have generated favorable assessments of how this major reform has created virtuous cycles within the economy, positively affecting economic fundamentals and continuing to fuel investor confidence," the central bank’s Investor Relations Office executive director Rene Pizarro said.

"We are particularly pleased to note that these investors have taken our view of a likely positive rating outlook from the rating agencies as they become increasingly convinced of the evidence that the country is delivering targeted results," said Pizarro.

Further, the IRO director underscored the importance of foreign investors conducting direct dialogues with country stakeholders. "The Investor Relations Office is proud to have played a role in communicating the success of the dynamic Philippine economy through coordinating in-bound investor missions. We are glad that our investment bank clients have recognized this role as they regularly coordinate their visits with IRO, helping us ensure that investor decisions benefit from a comprehensive understanding of the progress in reforms and what they mean for the economic fundamentals of the country," he added.