International Moody's for 2nd Upgrade of the Philippines Credit Rating in 2011

The Philippines could secure a credit rating upgrade this year due to an improving financial position, Moody’s Investor Service said, although more needed to be done to strengthen revenues and there were risks from inflation and global uncertainties.

In January, Moody’s upgraded the country’s outlook to positive from stable, citing its strong external payments position and sound macroeconomic prospects, indicating a rating change could be anticipated over 12 to 18 months.

“That is the timeline, but we don’t have to wait for the whole 12 to 18 months, it could happen before, we don’t need to wait for next year,” Christian de Guzman, the rating agency’s lead sovereign analyst for the Philippines, told Reuters in an interview, pointing to a small budget deficit in the first quarter.

“The case for the upgrade is much stronger.”

“The news flow is quite encouraging but it is still a very risky global environment, so it depends on how the Philippines can navigate its way through this,” he said on Monday evening.

Moody’s rates the Philippines at Ba3, three rungs below investment grade. 

The government has made notable gains in fiscal management, but more structural reforms were needed to ensure fiscal sustainability and boost long-term growth, De Guzman said.

An improved credit rating would allow the Philippines government to borrow funds more cheaply than it otherwise could, and would make the country more attractive to risk-averse investors.  

The government posted a first-quarter budget deficit of 26.2 billion pesos ($605 million), less than a quarter of the target, but that was mainly due to lower-than-programmed spending.

Manila wants to cut its fiscal shortfall to 3.2 percent of GDP this year, from 3.7 percent last year, and trim it to two percent in 2013 and then maintain it there.

The government has been battling widespread corruption and tax evasion. It is trying to enforce existing laws, including prosecuting tax evaders, to lift its revenue-to-GDP ratio from 15.6 percent in 2010, before considering increases in tax rates.

“A lot has been done, the government is very proactive, we see cases filed every week but if they don’t put someone in jail, will the fear factor be sustained?,” De Guzman said.

“The administration is making all the right noises, but it needs to put some bite into that bark,” he said.

Aspirational traget

There were risks from inflation, which hit a one-year high of 4.5 percent in April, because of rising fuel and food costs, though Moody’s expects annual inflation to remain within the central bank’s three to five inflation target range for this year.

“Inflation is creeping up, but our view is that the BSP can manage it very well, and inflation in the Philippines this year will fall within its target range and that is important,” De Guzman said.

The Bangko Sentral ng Pilipinas (BSP) has raised interest rates twice since late March, lifting the overnight borrowing rate by 50 basis points to a two-year high of 4.5 percent, and De Guzman said he expects further policy tightening.

“I believe they are going to tighten more this year, but in terms of managing inflation expectations the BSP has done a very good job,” he said.

Constrained by the budget deficit and pressing social spending needs, the government is banking on the private sector to fund infrastructure investments that it hopes will lift economic growth to 7 to 8 percent in 2011 and beyond.

Moody’s forecasts 2011 growth of at least five percent for the Philippines, below the government’s 7 to 8 percent target.