Moody's keeps Philippines' investment grade but warns of downgrade risks

MANILA, Philippines — Moody’s Investors Service on Friday retained its grade and outlook on the Philippines, but warned of risks that could erode the sovereign’s credit rating.

In a statement, the global debt watcher said it has affirmed the Philippines’ long-term local currency and foreign currency issuer and senior unsecured debt ratings at “Baa2”—a notch above minimum investment grade—and maintained the outlook at stable.

This matches the ratings earlier given by the other two of the so-called “big three” debt watchers, Fitch Ratings and S&P Global Ratings. A higher rating can lower the cost of borrowing in foreign currencies and can increase the country’s ability to attract foreign investment.

“The Philippines' Baa2 rating reflects a number of credit strengths, including limited vulnerability to external shocks, balanced by longstanding structural credit constraints resulting from some of its economic, fiscal and institutional features,” Moody’s said.

“These are balanced against more negative features which constrain the rating, principally low per capita incomes and, relatedly, still low revenue-raising capacity as compared to similarly rated peer countries,” it added.

Amid double-digit credit growth that has fueled concerns of overheating, the Philippine economy grew 6.8 percent in the first quarter, faster than the preceding three month’s 6.5 percent and the 6.4 percent recorded in the comparable period last year.

Risks

According to Moody’s, the Philippines’ credit rating would likely be downgraded if macroeconomic stability were to be threatened by “unabated” overheating pressures. 

Moody’s also warned that Philippine President Rodrigo Duterte’s contentious policies on law and order over the past two years, as well as other political controversies, may have a “negative impact” on the Philippines' attractiveness to investors.

The credit rater likewise expressed concern over the recent Supreme Court ruling that increases the share of local government units’ internal revenue allotments and the proposed shift to a federal form of government, saying such changes could have “negative implications for public finances.”