MANILA, Philippines (UPDATE) - Moody's Investor Services upgraded the outlook on the Philippines' foreign and local-currency bond ratings to positive from stable on Thursday, a day after the government sold $1.25 billion of global peso bonds.
A rating upgrade would depend on the government's commitment to fiscal consolidation in an improving economic environment, the ratings agency said in a statement.
"Most likely, this will require continued expenditure restraint and improved revenue performance," Moody's said, noting the government had made a "notable turnaround in fiscal management" in its first 6 months in office.
Moody's rates the Philippines at Ba3, 3 rungs below investment grade. An investment grade rating would lower the costs of borrowing and servicing debt for the country, and would also widen the pool of potential investors in its bonds.
The Philippines, Asia's largest sovereign issuer of foreign currency debt, sold $1.25 billion of 25-year global peso bonds on Wednesday.
Strong economic fundamentals
Moody's cited a strengthening external payments position, well-anchored inflation expectations and improved prospects for economic reform as behind the outlook upgrade.
"Foreign exchange reserves continue to accrue at record levels on the back of robust overseas foreign worker remittances, services exports, and sizeable capital inflows," said Christian de Guzman, an Assistant Vice President at Moody's and its lead sovereign analyst for the Philippines.
"The BSP's (central bank) inflation targeting regime has gained traction and has contributed to macroeconomic stability," he added.
Prospects for greater political stability following the unambiguous outcome of the May 2010 national elections also added momentum to resilient economic growth by encouraging more foreign direct investments and boosting domestic consumer confidence.
De Guzman said the government also posted a turnaround in fiscal management in the first semester of 2010, but its debt stock remains large compared with its rating peers.
Gov't hopes for rating upgrade
Meanwhile, the Aquino administration welcomed Moody's outlook upgrade, saying it came at a time when the outlook for many other economies was more cautious.
"Moody's action reflects the international markets' recognition of the improving fiscal and monetary conditions in the country," Presidential Communications Strategy Secretary Ricky Carandang said.
"The Aquino administration is encouraged by this development and is continuing its efforts to improve the environment for both portfolio and direct investments," he added.
Carandang, along with National Treasurer Roberto Tan, said the government was looking forward to an actual rating upgrade from Moody's.
"We hope with this favorable outlook change, an upgrade is forthcoming in the near future," Tan said.
In November, another debt watcher, Standard & Poor's, raised the Philippines' foreign currency rating to BB, 2 notches below investment grade. Fitch Ratings also rates the country 2 notches below investment grade.
Lower budget deficit
The government has said the budget deficit for 2010 would be lower than a forecast of P325 billion, or 3.9% of GDP. It has forecast the deficit will fall to 2% of GDP by the end of 2013 and then be maintained at that level.
Before the change was announced, Finance Secretary Cesar Purisima said the Philippines deserved a ratings upgrade.
"I think it's a matter of time that, so long as we continue to focus on the fundamentals, good things will happen," he told reporters.
"As far as I'm concerned... the market is giving us already a rating that is much higher, so I really leave it up to them."