Moody's affirms PHL investment grade rating with stable outlook

Debt watcher Moody's Investors Service on Tuesday affirmed the Philippine investment grade credit rating with a stable outlook on the back of expectations that point to a strong economic performance.

In its latest report, Moody's said it affirmed the country's "Baa2" long-term issuer and senior unsecured debt ratings.

Obligations rated "Baa2" are subject to moderate credit risk and are considered medium grade and may possess certain speculative characteristics.

"Moody's expects that the Philippines' economic performance will remain strong while debt consolidation will continue and foster further convergence of key fiscal metrics versus corresponding peer medians," the debt watcher noted.

The Baa2 rating also reflects high economic strength that balances the country's large scale and rapid growth against low per capita income relative to peers.

"Our assessment of its institutional strength incorporates a long track record of sustaining macroeconomic and financial stability, despite weaker Worldwide Governance Indicators as compared to other investment grade countries," Moody's noted.

"The government's fiscal strength reflects low government debt compared to most Baa2-rated peers, as well as low debt affordability and a somewhat elevated vulnerability to exchange rate depreciation – although each of these indicators have shown significant improvement over the past decade," it added.

Moody's took note that the health of the Philippine banking system and the external payments position dampen the country's susceptibility to event risks.

However, the debt watcher said that domestic political developments could potentially undermine institutional strength and economic performance.

"Recent events such as the conflict in Marawi and the subsequent imposition of martial law in Mindanao are examples of escalating domestic political risks that could, should they multiply and escalate, undermine institutional strength and, ultimately, economic growth," it said.

Moody's said it expects the country's growth to be sustained at above 6 percent per year over the next two years, driven largely by the private sector.

"In particular, we forecast that household consumption will continue to be supported by the stability of remittances from overseas Filipino workers," the debt watcher said.

"Moreover, FDI inflows – which saw a record high in 2016 of $7.9 billion (2.6 percent of GDP, up 40.7 percent vs. 2015), but remain lower than in other countries in the region – will provide ongoing diversification of the economy. Furthermore, the improvement in the external environment is positive for goods exports and business process outsourcing (BPO) receipts, which comprise the bulk of services exports," it added.

In the long-term, Moody's said the Philippines stands to benefit from a demographic dividend of a young and growing population, which imparts stability to private consumption growth and reduces the burden of aging-related costs on government finances.

"In the absence of more sustained improvements in budget execution, we do not expect fiscal deficits to widen to the government's deficit target of 3 percent of GDP over the next two years," the debt-watcher said.

"We project the Philippines' indebtedness to remain low over the medium-term compared to similarly-rated sovereigns, with general government debt falling to around 37 percent of GDP by 2017," it added.

Moody's said that upward pressure on the sovereign rating would arise should the predictability and stability of the political climate improve, or should the government succeed in defusing signs of prospective overheating in the economy and financial system.

"Conversely, the emergence of macroeconomic instability, leading to a deterioration in fiscal and government debt metrics and an erosion of the country's external payments position, would exert downward pressure on the rating," it noted.

"A rapid escalation of domestic political conflict that undermined institutional strength and the government's reform agenda would also be credit negative," it added. — VDS, GMA News