S&P upgrades Phl outlook to positive

MANILA, Philippines - The Philippines’ bid for an investment grade got a boost yesterday after Standard & Poor’s (S&P) Rating Services upgraded its credit rating outlook for the country from “stable” to “positive” on the back of strong confidence to the Aquino administration.

The upgrade indicates the country, which has a BB+ long-term foreign-currency rating from S&P, could notch its first-ever investment grade rating over the next 12 to 18 months. Such a status would mean lower debt interest payments and attracting more foreign investments.

“The positive outlook reflects our more favorable assessment of the prevailing political conditions and of the administration’s improved capacity to pursue its reform agenda,” the debt watcher said.

“In our view, the current administration, which took office in June 2010, possesses a level of legitimacy, support, and stability that reduces political uncertainty and allows for improved legislative efficiency,” it explained.

“We may raise the ratings next year on an improved government revenue structure, a continued diminished reliance on foreign currency government debt financing, or a lower government debt burden,” it also said.

Finance Secretary Cesar Purisima, in a statement, welcomed S&P’s move, saying the upgrade is “another example that good governance is good economics.”

“By focusing on the fiscal and macroeconomic stability of the country, reducing the infrastructure gap, and making doing business in the Philippines even more fun, we are confident that we will attain investment grade sooner rather than later,” Purisima said.

The outlook revision was announced in time for the signing into law of the “sin tax“ reform measure, supported by credit raters for its goal of raising more revenues from tobacco and liquor products. It is expected to generate an estimated P34 billion in its first year of implementation.

It also came a day after President Aquino signed the P2.006-trillion General Appropriations Act for 2013, which ensured that the government will operate under a new budget to fund new and existing programs from day one.

The two laws  - together with the just-ratified Reproductive Health bill- were among the priority measures of the government.

“This conducive political setting enables the administration to focus on its key policy objectives of fiscal consolidation, increased infrastructure provision, and poverty reduction,” S&P said.

Aside from the sound political climate, the credit rater also noted of the improving balance sheet of the national government owing to tax administration measures, including the fight against tax evasion and smuggling, which allowed revenue growth to surpass economic growth.

Faster revenue growth vis-à-vis economic growth is seen beneficial since it indicates that the country is generating more than enough money to fund government programs such as infrastructure projects and social welfare projects. As of the third quarter, revenue growth of 10 percent far exceeds economic growth of 6.5 percent.

It projected that “ongoing legislative initiatives” would yield additional revenues equivalent to one percent to 1.5 percent of economic output, “sufficient to maintain fiscal consolidation and a modest rise in public spending.”

The Philippines’ sound external profile is another plus, S&P said, noting record-high cash buffers, current account surpluses and balance of payments surplus which all indicate adequate supply of dollars to service foreign debts and imports.

“The Philippines’ strong external liquidity is underpinned by its exchange-rate management and declining foreign borrowing for budget financing,” S&P explained.