Moody's keeps positive outlook on RP rating

MANILA, Philippines - Moody’s is keeping its positive outlook on the country’s credit ratings, saying that credit fundamentals held up well through the global economic turmoil.

Moody’s Investor Service said the possibility of an upgrade in credit ratings depended on the ability of the government to protect the fortified external payments position and minimize adverse affects on government finances from the global recession.

According to Moody’s in its annual report on the Philippines, the country’s external payments position is stronger than a year earlier with support from a flexible exchange rate policy and continuing large inflows of remittances from overseas Filipino workers (OFWs).

“Moreover, the domestic financial system has not posed risks, as it has avoided the types of stress evident in many other systems regionally and globally,” said Tom Byrne, Moody’s senior vice president who authored the report on the Philippines.

“Furthermore, the dollar credit crunch has had little impact, given ample liquidity in the domestic market with top grade corporates issuing bonds, even through the last quarter of 2008, and robust double-digit bank loan growth,” added Byrne. “And the central bank has not had to resort to blanket bank deposit or external loan guarantees.”

In the report, Moody’s said the Philippines had low economic strength, moderate institutional strength, low government financial strength but also had low susceptibility to event risks.

Moody’s said the country’s economic growth in 2008 slowed, but did not collapse late in the year, as it did elsewhere, in large part due to the steady increase in OFW remittances, the report says.

But Moody’s pointed out that investment and exports faltered in the fourth quarter of 2008, suggesting that contagion effects from the global recession on domestic economic activity would become increasingly evident in 2009.

The Arroyo administration had decided to increase spending instead of balancing the budget but Moody’s said this would not necessarily reverse the progress made in recent years in placing its debt metrics on an improving trend.

“Nevertheless, stronger tax revenue performance is crucial to long-term fiscal sustainability, while adept management of debt and controls on expenditure alone cannot ensure such sustainability,” Byrne said.

Moody’s said that the Philippines scored in the sovereign bond rating range of Ba2 to B1 which the credit rating agency said reflected the large overhang in public sector debt and strained government finances.

Specifically, Moody’s said the positive outlook on the B1 rating for government foreign and local currency bonds, the Ba3/Not Prime foreign currency country ceiling, and the B1/Not Prime foreign currency bank deposit ceiling was affirmed in February 2009.

For the country’s actual credit rating to be upgraded, Moody’s said the government would have to protect the fortified external payments position and minimize adverse affects on government finances from the global recession.