London-based Fitch Ratings assigned yesterday a long-term foreign currency rating of ‘BB’ to the country’s $1.5-billion 10-year global bonds sold on Thursday.
A BB rating indicates that there is a possibility of credit risk developing, particularly as a result of adverse economic change overtime, Fitch said. Securities rated in this category are not investment grade.
The 10-year bonds were priced at 99.158 percent to yield 8.500 percent. The rating is in line with the country’s foreign currency IDR or issuer default rating of ‘BB’.
According to Fitch, short- and long-term IDRs may be assigned to entities for certain sectors, including corporate, financial institution and sovereign entities, which reflect the ability of an entity to meet financial commitments on a timely basis.
Fitch has a stable outlook on the Philippines’ sovereign ratings (long-term foreign currency IDR ‘BB’/long-term local currency IDR ‘BB+’) despite the negative implications of the global economic slowdown on the country.
“The Philippines is going to fare reasonably well when compared to some of the other sovereigns rated in the ‘BB’ category,” said Franklin Poon, director Fitch’s Sovereign group.
The debt watcher expects the Philippine economy to grow by only to 2.5 percent in 2009, slower than the official gross domestic product (GDP) forecast range of 3.7 percent to 4.7 percent.
Fitch also expects the National Government’s budget shortfall to widen to 2.3 percent of GDP.
Furthermore, Fitch also said that remittances from overseas workers, which account for more than 10 percent of the country’s total economic output and has been an important driver for both external financing and the overall economy, will also be affected. Fitch expects the country’s current account to turn into a small deficit this year, and foreign reserves to decline slightly from last year’s $37.1 billion.
On a positive note, a stable monetary and exchange rate environment has proved conducive to investor sentiment towards the sovereign’s return to international capital markets. Inflation in the Philippines has come down, and the peso has been able to recover some ground against the US dollar recently, Fitch noted.
At the same time, however, Fitch said that structural issues, such as interest payments accounting for more than 20 percent of fiscal revenue, the narrow tax base below 20 percent of GDP, and a large public debt stock, nevertheless remain.
“Fiscal flexibility is especially important in times of economic difficulties, when fiscal stimulation is needed as a buffer against a slowing economy,” said Poon.
Meanwhile, Moody’s Investors Service, also an international ratings agency, assigned a B1 rating with a “positive” outlook on the Philippines’ 10-year bond.
“The B1 rating on the government’s foreign and local currency bonds also reflects the country’s large public sector debt overhang, which leaves government finances vulnerable to shocks,” Moody’s senior vice president and regional credit officer Tom Byrne said.