May 2, 2013 11:46 am

Philippines gains investment-grade status

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The Philippines has secured solid investment grade status after Standard & Poor’s became the second major agency to raise the country’s credit rating.

S&P simultaneously cut its outlook for neighbouring Indonesia, confirming the Philippines’ place as the current darling of emerging market investors in Asia. The Philippines now enjoys the same S&P rating as Spain.

“The upgrade on the Philippines reflects a strengthening external profile, moderating inflation and the government’s declining reliance on foreign currency debt,” said S&P analyst Agost Benard in a statement explaining the decision.

The Philippines’ foreign currency debt is now rated triple B minus by both S&P and rival Fitch, which upgraded the country at the end of March. The additional upgrade means that global funds tracking investment grade credit can now include Philippines government bonds.

“We expect more capital inflows into bonds and credit given that both S&P and Fitch have now upgraded the Philippines to investment grade,” said Robert Prior-Wandesforde, head of Asia research at Credit Suisse in a note to clients.

The Philippines has been a hotspot for investors since the election of Benigno Aquino in 2010.

Growth in the Philippines has picked up significantly, reaching 6.6 per cent last year. The International Monetary Fund expects that strong performance to continue, and forecasts 6 per cent growth this year.

Meanwhile, the Manila equity market has soared, becoming the best performing index in Asia in the past two years. It is now the most expensive stock market in the world on a price to earnings basis, leading some to warn that investing in the country has already become a “crowded trade”.

The Philippines peso has also risen more against the US dollar than any other Asian currency in the past year, while borrowing costs have dropped sharply.

Despite the wave of foreign capital, the stronger currency has helped the Philippines to maintain a relatively low inflation rate, which gave S&P further confidence in its decision to upgrade the country. The central bank recently said it plans to borrow more in its own currency, to reduce the risks of external shocks and to ease upward pressure on the peso, which it fears could harm exporters.

However, the agency said the Aquino government still had more work to do.

“The Philippine economy’s low income level remains a key rating constraint. Per capita gross domestic product, at a projected $2,850 in 2013, is below that of most similarly rated sovereigns. The concentrated nature of the economy, infrastructure shortfalls and restrictions on foreign ownership, which deter foreign investment, are factors that hamper growth,” S&P said.

The positive upgrade of the Philippines contrasts with a simultaneous cut to the credit outlook for Indonesia.

Unlike the other two main rating agencies, S&P is yet to upgrade Indonesia to investment grade, and on Thursday it said it was unlikely to do so before the national elections next year because of “the stalling of reform momentum and a weaker external profile”.

Although Indonesia’s economy is booming, with GDP growing at more than 6 per cent per year investors are concerned about the government’s increasingly protectionist trade and investment policies and a marked deterioration in the current account position, driven by the falling price of key export commodities and the rising cost of energy subsidies.

“Political considerations related to next year’s parliamentary and presidential elections appear to increasingly shape policy formulation,” S&P said. “This weakening policy environment may ultimately have a negative impact on growth prospects and the generally sound economic conditions.”

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