Surprise Positive Outlook on an Expected Investment Grade Rating

PHILIPPINES - In Brief 03 Oct 2013 by Romeo Bernardo

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Moody’s raised today the Philippine government credit from Ba1 to an investment grade of Baa3, an action that would have been dismissed as long-delayed were it not for the positive outlook that came with it.  The positive outlook “reflects the expectation of continued economic outperformance by the Philippines relative to peers, which, in turn, would further support debt consolidation and associated improvements in debt affordability and sustainability,” Moody’s said in its statement.  It added that “sustained political stability points to better prospects for reform over the second half of the current presidential administration.” Moody’s assessment on the economic front echoes most analysts’ view of the country’s fundamentals, with the Manila-based Asian Development Bank having just raised its growth forecast for 2013 and 2014 to 7% and 6.1%, respectively.  While we continue to share this positive outlook (See Quarterly Report, “In a good place,” 8 August 2013), we take a more cautious view of the prospectsfor reform going forward. Mainly, this is because we think that with the pork barrel issue still unresolved, the President will be distracted from pursuing needed economic reforms (e.g., fiscal incentives, customs cleanup) as well as public infrastructure projects, whether on-budget or PPP.  These will be needed to steer more brick and mortar investments into the country and create jobs needed for the economy to enter what Moody’s sees as “a structural shift to higher growth.”  But at this time, continuing public protests over what is seen as a mere realignment of pork barrel funds in the budget tell us that the issue will not go away until the President is able to...