Research Update:

Ratings On The Republic Of The

Philippines Raised To 'BBB/A-2';
Outlook Stable
Primary Credit Analyst:
Agost Benard, Singapore (65) 6239-6347; agost.benard@standardandpoors.com
Secondary Contact:
Takahira Ogawa, Singapore (65) 6239-6342; takahira.ogawa@standardandpoors.com
Table Of Contents
Overview
Rating Action
Rationale
Outlook
Key Statistics
Related Criteria And Research
Ratings List
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Research Update:
Ratings On The Republic Of The Philippines
Raised To 'BBB/A-2'; Outlook Stable
Overview
We expect ongoing reforms on a broad range of structural, administrative,
institutional, and governance issues to endure beyond the term of the
current administration.
We are raising our long-term sovereign credit rating on the Republic of
the Philippines to 'BBB', from 'BBB-', and our short-term rating to
'A-2', from 'A-3'. We are also raising the transfer and convertibility
assessment on Philippines to 'BBB+' from 'BBB'. In addition, we are
raising our ASEAN regional scale rating to 'axA/axA-2', from 'axA-/axA-2'.
The stable outlook on the long-term sovereign rating reflects our
expectation that the Philippines' credit metrics will continue to
improve, but we expect slow progress in raising per capita wealth and
alleviating structural impediments to higher growth.
Rating Action
On May 8, 2014, Standard & Poor's Ratings Services raised its long-term
sovereign credit ratings on the Republic of the Philippines to 'BBB' from
'BBB-', and its short-term rating to 'A-2' from 'A-3'. The outlook is stable.
In addition, we raised our ASEAN regional scale rating to 'axA/axA-2', from
'axA-/axA-2'. The transfer and convertibility assessment was also raised to
'BBB+' from 'BBB'.
Rationale
We raised the ratings because we now believe the ongoing reforms to address
shortcomings in structural, administrative, institutional, and governance
areas will endure beyond the current administration. In turn, we believe the
resulting gains in government revenue generation, spending efficiency, and the
improvements in public debt profile and investment environment will at least
be preserved in the medium term under the next administration. This is based
on our assessment that even though a change of administration after the
presidential elections in 2016 represents some uncertainty for reforms, the
risks have shifted toward maintaining the impetus and direction of the
process, away from a potential reversal or abandonment of advances achieved to
date.
The ratings on the Philippines also reflect the country's strong external
liquidity and international investment position, combined with an effective
monetary policy framework relative to the country's income level; the
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Philippines has sustained low inflation and interest rate. These rating
supports are weighed against a relatively low income level and fiscal
constraints owing to a narrow revenue base and a shortage of basic
infrastructure and government services.
The Philippines' strong external profile is an important credit support. With
a long track record of balance-of-payments surpluses, the Philippines has
accumulated a substantial foreign exchange reserve buffer. That buffer affords
an import coverage ratio above prudential norms and low refinancing risk. We
expect that remittances and service exports of the business process
outsourcing industry will continue to generate foreign exchange earnings that
more than offset trade deficits of 6%-9% of GDP. Accordingly, we forecast that
the country's current account will remain in surplus, even if all the errors
and omissions of the balance of payments (about 1.5% of GDP) are attributed to
under-reported imports.
The rise in external assets combined with decreasing external borrowing by
both the government and the corporate sector is reflected in the external
assets of the public and financial sector exceeding the nation's external
debt. Nevertheless, the Philippines is in a small net external liability
position, at 40% of current account receipts at the end of 2013, and its net
income payments are slightly negative.
An improved monetary policy environment is another rating support.
Philippines' inflation has been low and fairly stable in the face of repeated
external shocks, even as lingering structural and institutional shortcomings
curb the effectiveness of it monetary policy. As a result, inflation
expectations are well anchored, enabling a low interest rate environment to
take hold.
The Philippine economy's low income level remains a key rating constraint. At
a projected US$2,900 in 2014, the Philippines' per capita GDP is well below
that of most similarly rated sovereigns. About 8% of the Philippines' active
population works abroad, underscoring the economy's inability to absorb a
highly motivated and skilled work force.
While structural changes have boosted the trend growth for real per capita GDP
to an estimated 4.3% in 2014, compared with 3.2% five years ago, numerous
impediments to growth remain. We project that the economy's low income and
associated vulnerabilities will remain a rating constraint in the medium term.
However, taking into account remittances, the Philippines' gross national
product is about a third higher than its GDP. On that measure, the country's
payment capacity would be greater, particularly when the remittances are as
durable as they have been.
The ratings are additionally constrained by the country's moderate
revenue-generating capacity due to a narrow tax base and high levels of
non-compliance. In addition, a shortage of basic infrastructure and public
services constrains Philippines' fiscal flexibility and growth prospects. The
revenue weakness is being addressed by administrative measures aimed at
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Research Update: Ratings On The Republic Of The Philippines Raised To 'BBB/A-2'; Outlook Stable
boosting collection efficiency and reducing evasion. Revenue growth has been
exceeding nominal GDP growth for the past three years, suggesting
strengthening collection efficiency in income taxes and customs duties. We
expect the ongoing revenue reform program will yield revenue growth of an
average of 0.5% of GDP per year, allowing greater public spending while
adhering to a path of fiscal consolidation.
Outlook
The stable outlook indicates that we expect a less than one-in-three
probability that we will change the ratings this year or next. Although we
forecast the Philippines' fiscal credit metrics will continue to improve, we
expect slow progress in raising per capita wealth and alleviating numerous
structural impediments to higher growth.
We may raise the ratings if institutional and structural reforms lead to an
improved investment environment and increased growth potential, or if ongoing
changes in governance and the policy environment lead us to a better
assessment of institutional and governance effectiveness.
On the other hand, we may lower the ratings if the administration's reform
agenda stalls or if a successor administration pursues policies that reverse
the improving trajectory of the Philippines' fiscal or external positions.
Key Statistics
Table 1
Republic of the Philippines--Selected Indicators
2007 2008 2009 2010 2011 2012 2013e 2014f 2015f 2016f 2017f
Nominal
GDP (US$
bil.)
149 174 168 200 224 250 272 286 314 347 383
GDP per
capita
(US$)
1,684 1,925 1,850 2,155 2,379 2,612 2,793 2,889 3,118 3,387 3,676
Real GDP
growth
(%)
6.6 4.2 1.1 7.6 3.6 6.8 7.2 6.6 6.0 6.1 6.1
Real GDP
per capita
growth
(%)
4.6 2.1 0.6 5.8 1.9 5.0 5.4 4.8 4.2 4.3 4.3
Change in
general
government
debt/GDP
(%)
(2.7) 12.6 1.9 3.3 1.4 4.2 0.5 2.4 2.5 2.8 2.8
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Research Update: Ratings On The Republic Of The Philippines Raised To 'BBB/A-2'; Outlook Stable
Table 1
Republic of the Philippines--Selected Indicators (cont.)
General
government
balance/GDP
(%)
0.6 0.4 (2.8) (2.7) (1.1) (0.9) (0.1) (0.7) (0.8) (1.0) (1.0)
General
government
debt/GDP
(%)
44.2 52.1 52.0 49.7 47.5 47.8 44.2 42.7 41.6 40.5 39.5
Net
general
government
debt/GDP
(%)
31.9 39.8 39.5 35.1 33.2 30.0 27.6 25.8 24.4 23.1 22.0
General
government
interest
expenditure/revenues
(%)
17.2 16.3 17.5 16.9 14.2 14.2 13.1 10.4 9.0 8.1 7.6
Oth dc
claims on
resident
non-govt.
sector/GDP
(%)
35.1 34.1 34.7 35.0 38.4 40.4 42.4 44.4 46.2 48.2 50.3
CPI
growth
(%)
2.9 8.3 4.1 3.9 4.6 3.2 3.0 3.9 3.5 3.7 3.7
Gross
external
financing
needs/CARs
+use. res
(%)
79.9 82.5 70.1 67.3 64.4 60.2 58.9 63.4 63.0 65.2 67.4
Current
account
balance/GDP
(%)
5.4 0.1 5.0 3.6 2.5 2.8 3.5 2.6 2.0 1.7 1.5
Current
account
balance/CARs
(%)
11.8 0.2 12.7 9.1 6.7 7.3 9.8 7.1 5.7 4.8 4.3
Narrow
net
external
debt/CARs
(%)
21.8 12.5 0.1 (9.1) (11.0) (12.4) (7.6) (9.4) (9.5) (6.2) (6.4)
Net
external
liabilities/CARs
(%)
63.7 42.2 34.6 33.2 29.2 35.9 40.3 32.0 27.0 24.1 16.8
Other depository corporations (dc) are financial corporations (other than the central bank) whose liabilities are included in the national definition
of broad money. Gross external financing needs are defined as current account payments plus short-term external debt at the end of the prior year
plus nonresident deposits at the end of the prior year plus long-term external debt maturing within the year. Narrow net external debt is defined as
the stock of foreign and local currency public- and private- sector borrowings from nonresidents minus official reserves minus public-sector liquid
assets held by nonresidents minus financial sector loans to, deposits with, or investments in nonresident entities. A negative number indicates net
external lending. CARs--Current account receipts.
The data and ratios above result from S&Ps own calculations, drawing on national as well as international sources, reflecting S&Ps independent
view on the timeliness, coverage, accuracy, credibility, and usability of available information.
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Research Update: Ratings On The Republic Of The Philippines Raised To 'BBB/A-2'; Outlook Stable
Related Criteria And Research
Related Criteria
Sovereign Government Rating Methodology and Assumptions, June 24, 2013
Methodology For Linking Short-Term And Long-Term Ratings For Corporate,
Insurance, And Sovereign Issuers, May 7, 2013
Methodology: Criteria For Determining Transfer And Convertibility
Assessments, May 18, 2009
Related Research
Sovereign Defaults And Rating Transition Data, 2013 Update, April 18,
2014
In accordance with our relevant policies and procedures, the Rating Committee
was composed of analysts that are qualified to vote in the committee, with
sufficient experience to convey the appropriate level of knowledge and
understanding of the methodology applicable (see 'Related Criteria And
Research'). At the onset of the committee, the chair confirmed that the
information provided to the Rating Committee by the primary analyst had been
distributed in a timely manner and was sufficient for Committee members to
make an informed decision.
After the primary analyst gave opening remarks and explained the
recommendation, the Committee discussed key rating factors and critical issues
in accordance with the relevant criteria. Qualitative and quantitative risk
factors were considered and discussed, looking at track-record and forecasts.
The chair ensured every voting member was given the opportunity to articulate
his/her opinion. The chair or designee reviewed the draft report to ensure
consistency with the Committee decision. The views and the decision of the
rating committee are summarized in the above rationale and outlook.
Ratings List
Upgraded
To From
Philippines (Republic of the)
Bangko Sentral ng Pilipinas
Sovereign Credit Rating BBB/Stable/A-2 BBB-/Stable/A-3
Philippines (Republic of the)
Transfer & Convertibility Assessment
Local Currency BBB+ BBB
Philippines (Republic of the)
Senior Unsecured BBB BBB-
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Research Update: Ratings On The Republic Of The Philippines Raised To 'BBB/A-2'; Outlook Stable
Senior Unsecured axA axA-
Bangko Sentral ng Pilipinas
Senior Unsecured BBB BBB-
Upgraded; Ratings Affirmed
To From
Philippines (Republic of the)
Bangko Sentral ng Pilipinas
Sovereign Credit Rating
ASEAN Regional Scale axA/--/axA-2 axA-/--/axA-2
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Research Update: Ratings On The Republic Of The Philippines Raised To 'BBB/A-2'; Outlook Stable
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