Singapore, June 27, 2017 -- Moody's Investors Service ("Moody's") has today affirmed the Government
of the Philippines' Baa2 long-term issuer and senior unsecured
debt ratings and maintained the outlook at stable.
The affirmation of the Baa2 rating and the assignment of a stable outlook
balances positive and negative factors. On the positive side,
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.
Set against that positive trend, domestic political developments
could potentially undermine institutional strength and economic performance.
Moreover, while broad macroeconomic stability has been maintained
so far, a number of metrics indicate material capacity constraints
that signal a risk of overheating.
Moody's has also affirmed the government's local currency and foreign
currency senior unsecured ratings at Baa2, the government's
foreign currency senior unsecured shelf rating at (P)Baa2 and the senior
unsecured ratings for the liabilities of the country's central bank,
Bangko Sentral ng Pilipinas (BSP), at Baa2. The outlook on
BSP has been removed.
The Philippines' country ceilings remain unchanged. The long-term
foreign currency bond ceiling remains at A3, and the short-term
foreign currency bond ceiling at P-2. The long-term
foreign currency deposit ceiling remains at Baa2, and the short-term
foreign currency deposit ceiling at P-2. Furthermore,
the long-term local currency bond and deposit ceilings remain unchanged
at A2.
RATINGS RATIONALE
RATIONALE FOR THE STABLE OUTLOOK
The stable outlook balances positive and negative developments in the
Philippines' credit profile.
STRONG GROWTH OUTLOOK
The Philippines' real GDP growth averaged 6.4% per
year between 2014 and 2016, more than twice the corresponding median
for Baa2-rated countries. We expect growth to be sustained
at above 6% 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. Moreover, FDI inflows--which saw a
record high in 2016 of $7.9 billion (2.6%
of GDP, up 40.7% 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.
Over the long run, the Philippines stands to benefit from a demographic
dividend. A young and growing population imparts stability to private
consumption growth and reduces the burden of aging-related costs
on government finances.
The near-term risks to the growth outlook are balanced.
On the upside, improved execution of government spending—especially
with regards to its infrastructure development plan—could raise
GDP growth towards the government's target range of 7%-8%.
However, downside risks include a worsening of the Islamist insurgency
that could lead to an expansion of martial law, undermine domestic
business confidence, and disrupt economic activity including in
economically significant regions. In addition, any further
shock to growth in the GCC region could reduce remittance inflows.
And US policies that could encourage onshoring of jobs could have a negative
impact on BPO exports.
ONGOING DEBT CONSOLIDATION AND IMPROVING FISCAL METRICS
The Philippines' unconsolidated general government debt, which
does not net out the holdings of social security institutions, fell
to 38.3% of GDP in 2016 from a recent peak of 47.8%
in 2009, supported by rapid nominal GDP growth and tighter fiscal
policy. In contrast, the corresponding peer median for Baa2-rated
countries has trended higher in recent years and is now higher than in
the Philippines.
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% of GDP over the next two years. In consequence,
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% of GDP by 2017.
Consequently, the Philippines' debt affordability has also
continued to improve as interest payments as a share of revenue excluding
privatization receipts fell to 13.9% in 2016, more
than 40% lower than 24.4% in 2010, albeit still
materially above the 8.5% median ratio amongst Baa2-rated
sovereigns.
INCREASED DOMESTIC POLITICAL RISK
Set against those positive developments, 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.
To date, neither appears an immediate concern. These events
do not appear to have weighed on economic growth. Nor do they appear
to have derailed the government's economic reform agenda; indeed,
the Comprehensive Tax Reform Package recently passed through the lower
house of Congress, in part due to the intervention of the President.
However, the confrontational nature of the administration's
political agenda could potentially reduce the effectiveness of governance,
or negatively affect investment and growth.
EMERGING CAPACITY CONSTRAINTS
Moreover, the prolonged period of robust growth has led to emerging
capacity constraints, as represented by rising inflation and the
reemergence of a current account deficit. High credit growth in
excess of nominal GDP growth since 2014 also exposes the banking system
to unseasoned risk.
The policy response to date has been effective, and mitigants exist.
The central bank has maintained the scope for policy tightening,
including a more strident application of current macroprudential measures.
Philippine banks retain considerable capital and liquidity buffers.
And the stock of foreign exchange reserves remains well above the country's
cross-border debt servicing requirements, as well as the
entire amount of the country's external debt.
However, looking ahead, the government's ability to
continue to contain these rising pressures will depend in part on its
efforts to raise investment in order to enhance infrastructure and address
economic bottlenecks. The government's plans in this respect
are ambitious and unlikely to be achieved in their entirety.
RATIONALE FOR Baa2 RATING
The Philippines' Baa2 rating 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. 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.
Moreover, the health of the banking system and the external payments
position dampen the Philippines' susceptibility to event risks.
WHAT COULD MOVE THE RATING UP/DOWN
Upward pressure on the sovereign's 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. Greater revenue mobilization that would lead
to a greater convergence of fiscal metrics with higher-rated peers
would also be positive.
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. A rapid escalation of domestic political
conflict that undermined institutional strength and the government's
reform agenda would also be credit negative.
GDP per capita (PPP basis, US$): 7,728 (2016
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 6.9% (2016 Actual)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 2.6%
(2016 Actual)
Gov. Financial Balance/GDP: -2.4% (2016
Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: 0.2% (2016 Actual) (also
known as External Balance)
External debt/GDP: 24.5% (2016 Actual)
Level of economic development: High level of economic resilience
Default history: No default events (on bonds or loans) have been
recorded since 1983.
On 22 June 2017, a rating committee was called to discuss the rating
of the Philippines, Government of. The main points raised
during the discussion were: The issuer's economic fundamentals,
including its economic strength, have not materially changed.
The issuer's institutional strength/ framework, have not materially
changed. The issuer's governance and/or management, have
not materially changed. The issuer's fiscal or financial strength,
including its debt profile, has not materially changed. The
issuer has become increasingly susceptible to event risks.
The principal methodology used in these ratings was Sovereign Bond Ratings
published in December 2016. Please see the Rating Methodologies
page on www.moodys.com for a copy of this methodology.
The weighting of all rating factors is described in the methodology used
in this credit rating action, if applicable.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the credit rating action on the support provider and in relation to
each particular credit rating action for securities that derive their
credit ratings from the support provider's credit rating.
For provisional ratings, this announcement provides certain regulatory
disclosures in relation to the provisional rating assigned, and
in relation to a definitive rating that may be assigned subsequent to
the final issuance of the debt, in each case where the transaction
structure and terms have not changed prior to the assignment of the definitive
rating in a manner that would have affected the rating. For further
information please see the ratings tab on the issuer/entity page for the
respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Christian de Guzman
VP - Senior Credit Officer
Sovereign Risk Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Atsi Sheth
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
