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SINGAPORE - Standard & Poor's Ratings Services today raised its sovereign credit ratings on the Republic of the Philippines to 'BBB-/A-3' from 'BB+/B'. The outlook is stable.

At the same time, Standard & Poor's raised its long-term ASEAN regional scale rating on the Philippines to 'axA-' from 'axBBB+'. We also raised the transfer and convertibility assessment to 'BBB' from 'BBB-' and affirmed our ASEAN regional scale short-term rating of 'axA-2'.

"The upgrade on the Philippines reflects a strengthening external profile, moderating inflation, and the government's declining reliance on foreign currency debt," said Standard & Poor's credit analyst Agost Benard.

"We expect the country to move into a near-balanced external position because of persistent current account surpluses, in which large net transfers from Filipinos working abroad more than offset ongoing trade deficits.

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The current and previous administrations improved fiscal flexibility through restraining expenditures, reducing the share of foreign currency debt, deepening domestic capital markets, and more recently through modest revenue gains.

The Philippines has built a substantial foreign exchange reserve buffer through having a long record of current account surpluses, along with modest net foreign direct investments (FDI) inflows and net portfolio equity inflows. The buffer makes for low refinancing risk and an import cover ratio well above prudential norms.

We expect continued remittance inflows from a large emigrant labor force along with an expanding business process outsourcing (BPO) industry to keep the current account in surplus over the next several years. Remittances and the BPO sector combined generate foreign exchange earnings of approximately 15% of GDP, comfortably covering trade deficits of 6%-9% of GDP.

"The Philippines' improved inflation environment is also a rating support. Despite some shortcomings in monetary policy transmission, inflation is low and fairly stable, helped partly by currency appreciation," Mr. Benard said.

The Philippine economy's low income level remains a key rating constraint. Per capita GDP, at a projected US$2,850 in 2013, is below that of most similarly rated sovereigns. The concentrated nature of the economy, infrastructure shortfalls, and restrictions on foreign ownership, which deter foreign investment, are factors that hamper growth. The economy is also unable to absorb its entire productive and workforce, as suggested by the high level of emigration.

Real GDP per capita growth averaged 3.3% over the past decade--somewhat slow at this stage in the country's development. Based on ongoing structural changes in the economy, rising private sector investment, and with increased fiscal space allowing greater public spending, we expect real GDP per capita growth to rise to 4.5% in the forecast period to 2016.

"The Philippines' gross national product is about a third higher than its GDP because of remittances," Mr. Benard said. "And it may be a better measure of the country's payment capacity, particularly when the remittances are as durable as they have been."

Fiscal consolidation has reduced gross general government debt to a projected 47% of GDP by 2013. However, the attendant interest burden of almost 13% of general government revenues is well above that seen for rated peers, and highlights the Philippines' low revenue base, and the relatively high, albeit declining, cost of commercial external debt, which makes up a quarter of government debt.

The stable rating outlook balances the policy flexibility afforded by current account surpluses and low deficits and inflation against the difficulties of alleviating numerous structural impediments to higher growth.

We may raise the ratings on evidence of government revenue reforms that facilitate needed improvements in physical and human capital, and institutional and structural reforms that boost private sector investment, including FDI. 

Conversely, we may lower the ratings if the Philippines' external performance weakens significantly, external inflows prove difficult to manage and spur overheating in the economy that contributes to banking pressures.

We may also lower our ratings if problems at one of the large conglomerates impair investor confidence, or if political developments cause the government to veer from its commitment to improving governance.

Source: http://www.interaksyon.com/business/60838/full-statement--why-sp-raised-the-philippines-to-investment-grade

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