Singapore, July 20, 2018 -- Moody's Investors Service ("Moody's") has today affirmed the Government
of the Philippines' long-term local currency and foreign currency
issuer and senior unsecured debt ratings at Baa2 and maintained the outlook
at stable.
The Baa2 rating incorporates a number of very positive credit features,
including the high economic strength derived from a large and fast-growing
economy, as well as improving fiscal strength based on moderate
government debt levels and gains in debt affordability. 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.
The stable outlook also balances positive and negative factors.
Moody's expects that growth will remain robust and that the Philippines'
fiscal metrics will strengthen somewhat as the government continues to
make progress on its socioeconomic reform agenda, but these trends
are likely to fall short of bringing the Philippines' credit profile
in line with higher-rated countries. At the same time,
policymakers face challenges in managing the current inflationary pressures.
In addition, domestic political developments and prospective changes
to governance frameworks, including a shift to a federal form of
government, present downside risks to the country's institutional
and fiscal profile.
Moody's has also affirmed 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. In Moody's view, the credit quality of the
central bank is closely aligned with that of the government.
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 AFFIRMATION OF THE Baa2 RATING
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.
The credit strengths include a relatively large economy and high growth
potential that support the economy's capacity to absorb shocks.
They also comprise a long track record of sustaining macroeconomic and
financial stability, with policies that continue to deliver stable
and relatively low debt levels. Moody's projection of the
Philippines' general government debt at around 38% of GDP
in 2017 is about 10 percentage points below the median Baa-rated
sovereign. The country's favorable demographics support steadily
rising labor inputs and potential growth, while reducing the burden
of ageing-related costs on government finances. In addition,
the long average residual maturity of the Philippines' government
debt, at around 12 years for its external obligations and 7.6
years for its domestic issuances, limits recurrent borrowing needs
and strengthens the stability of these needs.
Moreover, large foreign exchange reserves and low economy-wide
external debt contribute to macroeconomic stability. More generally,
relatively low reliance on either foreign sources of income or financing
insulates the Philippines from the direct impact of abrupt changes in
the global macroeconomic and financial environment.
At the same time, the Philippines' low per capita income relative
to peers, at roughly $8,300 in 2017 at purchasing power
parity compared with around $23,400 for the median Baa-rated
sovereign, is an important constraint on both economic strength
and the rating. A related and equally important constraint is the
government's limited capacity to generate revenue, which principally
reflects the population's low incomes and the large informal economy.
Despite recent and prospective improvements, government revenue
as a share of GDP remains well below the Baa-median as of 2017.
This means that despite moderate debt levels, interest payments
absorb a relatively large share of the comparatively narrow revenue base.
Finally, and contrasting with increasingly effective policymaking,
relatively weak rule of law and control of corruption weigh on the Philippines'
institutional capacity as compared to peers.
RATIONALE FOR THE STABLE OUTLOOK
The stable outlook balances positive and negative developments in the
Philippines' credit profile.
PROGRESS ON REFORM AGENDA SUPPORTS FISCAL STRENGTH BUT WILL NOT REMOVE
STRUCTURAL CONSTRAINTS
The government has made progress on several facets of the socioeconomic
reform agenda that was unveiled at the outset of the term of President
Rodrigo Duterte. In particular, tax reform has complemented
faster implementation of infrastructure development. As a result,
Moody's expects a broadly stable government debt burden at moderate
levels, below 40% of GDP, improving debt affordability,
and sustained high GDP growth.
The first package of the Tax Reform for Acceleration and Inclusion (TRAIN),
effective at the beginning of 2018, represents a comprehensive overhaul
of the tax code and has already had a pronounced impact on the government's
revenue performance in the first half of the year. Moody's
estimates that government revenue will rise to 16.2% of
GDP in 2018 and 16.7% in 2019, from 15.6%
last year, largely as a result of TRAIN1.
Further ahead, Moody's expects a structural improvement in
revenue as a result of the broadening of the tax base under TRAIN,
including its next phase currently under discussion -- TRAIN2 --
as well as ongoing efforts to enhance tax administration. In turn,
this will improve debt affordability, measured as interest payments
as a share of government revenue, albeit from moderate levels,
leading to an increase in the Philippines' fiscal strength.
A permanently higher revenue intake will provide some additional fiscal
room for higher spending, in particular on infrastructure.
In this respect, the government has also improved budget execution,
supporting its drive to boost infrastructure spending to over 7%
of GDP by 2022, up from around 5% in 2017 and as low as 1%
in 2011. This will contribute to the strengthening trend in gross
fixed capital formation and, consequently, potential growth.
However, these positive trends are likely to fall short of bringing
the Philippines' per capita incomes or debt affordability in line
with higher-rated countries.
POLICY CHALLENGES FROM INFLATIONARY PRESSURES
The Philippines is buffeted by a number of headwinds that contribute to
inflationary pressures. Based in part on the strong track record
of BSP in maintaining monetary and financial stability, Moody's
expects the rise in inflation since the beginning of 2018 to be transitory.
However, significant capacity constraints related to the Philippines'
topography, possibly persistent pressure on the currency and capital
inflows, and a current account balance in slight deficit,
pose material challenges to policymakers in ensuring that inflation expectations
and inflation pressure are contained.
Coinciding with these pressures, the peso has depreciated by around
7.0% against the US dollar year-to-date,
while benchmark 10-year government bond yields have fluctuated
and are around 60-70 basis points higher than at the end of last
year.
Although not our base case, indications that monetary policy may
not prevent a sustained rise in inflation above our current expectations
-- and beyond the one-off impact of the increase
in excise taxes from TRAIN1 -- would likely exacerbate upward
pressure on both market interest rates, capital outflows,
and downward pressure on the exchange rate. In the context of a
widening trade deficit that has led to a reversion of the current account
to a deficit in recent years, the susceptibility of the balance
of payments to capital outflows has increased.
In mitigation, 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. As
defined by Moody's External Vulnerability Indicator, the Philippines'
external debt repayment obligations due during 2018 amount to only a quarter
of its foreign currency reserves as of the end of 2017, denoting
ample reserve coverage.
DOMESTIC POLITICAL DEVELOPMENTS AND POTENTIAL GOVERNANCE CHANGES POSE
DOWNSIDE RISKS
The Philippine president'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 financial
and physical asset investors.
In addition, prospective changes to governance frameworks could
have negative implications for public finances. These include the
recent Supreme Court ruling that redefines the share of national government
revenue to be transferred to local levels of government, as well
as the proposed shift to a federal form of government from the current
centralized form of government.
In each of these cases, the fiscal impact will in part be determined
by the degree to which spending commitments will be devolved to the local
levels of government. The shift to federalism would also likely
incur an expansion in the aggregate size of the government and,
hence, public expenditure. At the same time, there
may be a gap between the national and local levels of government with
respect to their ability to manage fiscal resources, posing a risk
to the improved fiscal discipline that has characterized national government
finances over the past decade.
WHAT COULD MOVE THE RATING UP/DOWN
The Philippines' credit profile has a number of features which compare
well with higher-rated peers, but is principally constrained
by relatively low wealth and revenue-generating capacity.
Marked convergence of per capita incomes and revenue generation,
and as a result debt affordability, with higher-rated peers
would likely prompt Moody's to upgrade the rating. This could
materialize over time through continued progress on the government's
reform agenda, while policymakers avoided a build-up of inflationary
pressures.
Conversely, the rating would likely be downgraded if macroeconomic
stability were to be threatened by unabated overheating pressures leading
to a deterioration in fiscal and government debt metrics and an erosion
of the country's external payments position. The reversal of reforms
that have supported recent gains in economic and fiscal strength,
and/or the implementation of prospective changes in governance structures
in a way that diminishes fiscal strength would also likely lead to a downgrade.
GDP per capita (PPP basis, US$): 8,315 (2017
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 6.7% (2017 Actual)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 2.9%
(2017 Actual)
Gen. Gov. Financial Balance/GDP: -2.2%
(2017 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -0.8% (2017 Actual)
(also known as External Balance)
External debt/GDP: 23.3% (2017 Actual)
Level of economic development: Moderate level of economic resilience
Default history: No default events (on bonds or loans) have been
recorded since 1983.
On 18 July 2018, 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 fiscal or financial strength,
including its debt profile, has materially increased. Other
views raised included: 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 susceptibility to event risks has not materially
changed.
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
Marie Diron
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
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