Singapore, January 09, 2023 -- Moody's Investors Service ("Moody's") has today assigned a senior unsecured shelf rating of (P)Baa2 to the Government of the Philippines' shelf programme filed with the Securities and Exchange Commission (SEC) in the U.S., as well as senior unsecured ratings of Baa2 to the dollar-denominated bond offerings drawn from the shelf programme, which include tranches maturing in 2028, 2033 and 2048.
According to the terms and conditions available to Moody's, the bonds to be issued under the shelf programme will constitute direct, unconditional and unsubordinated obligations of the Government of the Philippines (the issuer). The bonds will rank pari passu with all of the issuer's current and future senior unsecured external debt obligations of the issuer.
The proceeds from the bonds are intended for general purposes including budgetary support and the repayment of a portion of the government's borrowings.
The ratings mirror the Government of the Philippines' issuer rating of Baa2.
RATINGS RATIONALE
The Philippines' Baa2 issuer rating takes into consideration high potential growth and a moderate government debt burden as compared to peers, as well as a sufficiently strong external position to meet forthcoming cross-border payment obligations and weather capital flow volatility. Structural credit challenges include low per capita income and some constraints to the quality of institutions, which stand in contrast to strong policy effectiveness. The Philippines also has a heightened susceptibility to environmental risks given the high incidence of climate-related shocks.
Even as it emerges from the pandemic with a degree of economic scarring, Moody's expects the recovery in real GDP growth to persist amid the deterioration in global credit conditions in the near-term, and converge towards potential rates of around 6% per annum beyond 2022. Unless the Philippines faces sustained and irreversible damage to domestic labor markets, a significant and prolonged drop in remittances or an acceleration in the fragmentation of regional supply chains, growth potential will continue to be boosted by favorable demographics and ongoing improvements in the investment climate.
At the same time, the Philippines' per capita income, which is lower relative to peers, at roughly $9,190 in 2021 at purchasing power parity compared with around $27,150 for the median Baa- rated sovereign, is an important constraint on both economic strength and the rating.
The fortification of the government's fiscal position prior to the pandemic provided a buffer against a rise in public indebtedness in recent years. National government debt rose to 60.4% of GDP in 2021 from 39.6% in 2019, effectively reversing the progress on debt consolidation over the past decade. However, debt affordability has eroded more moderately owing to gains from revenue reform and lower interest rates over time.
Relatedly, the track record of prudent economic and fiscal management, and a robust banking system, contribute to stable access to funding at moderate costs and support prospects for fiscal consolidation and debt stabilization after the shock subsides.
Large foreign exchange reserves--gross international reserves totaled $95.1 billion as of end-November 2022-- contribute to macroeconomic stability against the backdrop of current account deficits since 2016, notwithstanding a temporary return to a surplus in 2020. More generally, relatively low reliance on either portfolio investment or external bank borrowing insulates the Philippines from the direct impact of abrupt changes in the global macroeconomic and financial environment. However, external debt has risen significantly as the government has sought cross-border financing from both commercial and concessional sources to fund its pandemic response. Gross international reserves have fallen by more than $10 billion since the end of 2021, although reserve coverage of expected debt servicing remains ample.
The stable outlook reflects the view that the recovery from the acute shock posed by the coronavirus pandemic will restore rapid economic growth relative to peers, complemented by the stabilization and eventual reversal of the deterioration in fiscal and debt metrics. This scenario is balanced against the risk that the economy's potential is damaged more significantly than Moody's currently assumes, or that fiscal and economic reform momentum does not resume, leaving the Philippines' economic and fiscal strength somewhat weaker.
ENVIRONMENTAL, SOCIAL, AND GOVERNANCE (ESG) CONSIDERATIONS
The Philippines' moderately negative (CIS-3) ESG Credit Impact Score reflects high exposure to environmental risks and social risks, contained by institutional and economic resilience.
The Philippines' E issuer profile score is highly negative (E-4), given the high incidence of climate-related shocks, including typhoons and extreme precipitation leading to flooding. In addition, the relatively large, albeit declining, share of the labor force employed by the agricultural sector heightens the country's susceptibility to heat stress given the periodic episodes of drought. Inadequate and intermittent access to clean water, as well as issues with regards to waste and pollution, add to the Philippines' exposure to environmental risks.
The sovereign's S issuer profile score is highly negative (S-4), given pervasive levels of poverty and consequently low overall levels of wealth. In the context of rapid economic growth over the past decade, income inequality remains high while development gaps persist between large urban centers and rural areas. Labor markets feature a high share of informal employment, which is partially mitigated by household income support via remittances. Despite traction on socioeconomic reform, inadequate provision of healthcare and lack of sufficient access to basic services and housing contribute to social risks. Like many other emerging economies, the Philippines benefits from a benign demographic structure.
Governance is broadly in line with other sovereigns and does not pose specific risks, as captured in the neutral-to-low G issuer profile score (G-2). Strong macroeconomic and fiscal policy effectiveness compensates for comparatively weak political and legal governance, while providing some capacity to respond to environmental and social risks.
This credit rating and any associated review or outlook has been assigned on an anticipated/subsequent basis. Please see the most recent credit rating announcement posted on the issuer's page on https://ratings.moodys.com, under the reports tab, for related economic statistics included in rating announcements published after June 3, 2013.
This credit rating and any associated review or outlook has been assigned on an anticipated/subsequent basis. Please see the most recent credit rating announcement posted on the issuer's page on https://ratings.moodys.com, under the reports tab, for related summary rating committee minutes included in rating announcements published after June 3, 2013.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Moody's would consider upgrading the Philippines' sovereign rating upon evidence of a more rapid reversal of the deterioration in fiscal and debt metrics stemming from the pandemic shock. This would likely entail a sustained restoration of economic growth to rates similar to those recorded prior to the shock. Together, a resumption of sustained high growth and rapid restoration of fiscal strength would denote particularly effective macroeconomic and fiscal policy.
Factors that would prompt a downgrade of the Philippines' sovereign rating include a greater deterioration in fiscal and government debt metrics relative to peers or an erosion of the country's external payments position that threatens liquidity conditions. The reversal of reforms that have supported prior gains in economic and fiscal strength, as well as substantial deterioration in institutions and governance strength would also be negative.
The principal methodology used in these ratings was Sovereigns published in November 2022 and available at https://ratings.moodys.com/api/rmc-documents/395819. Alternatively, please see the Rating Methodologies page on https://ratings.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 further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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 issuer/deal page for the respective issuer on https://ratings.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.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website https://ratings.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://ratings.moodys.com/documents/PBC_1288235.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on https://ratings.moodys.com.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on https://ratings.moodys.com.
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Please see the issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating.
Christian de Guzman
Senior Vice President/Manager
Sovereign Risk Group
Moody's Investors Service Singapore Pte. Ltd.
71 Robinson Road #05-01/02
Singapore, 068895
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Gene Fang
Associate Managing Director
Sovereign Risk Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
71 Robinson Road #05-01/02
Singapore, 068895
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
