PH receives credit rating upgrade from Malaysian debt watcher

The Philippines received a credit rating upgrade from a Malaysian debt watcher, due to the progress the country is experiencing through the government’s infrastructure programs and other reforms, which are expected to help sustain economic growth.

In a statement released last last Wednesday, RAM Rating Services Berhad raised the Philippines’ global rating to “gBBB2(pi)” – a rank one notch above minimum investment on their scale. “The upgrade is premised on sustained growth momentum, a persistent uptrend in FDI (foreign direct investment) inflows and continuous progress in reforms,”said RAM.

RAM added that the country is also experiencing a “stable” outlook. “The stable outlook reflects the country’s strong external position and economic resilience, balanced by the government’s narrow revenue base and elevated underemployment and poverty rates,” said RAM.

This development comes a year after the Malaysian-based agency upgraded the Philippines’ rating outlook to “positive”, which means having better chances of a higher credit score. This higher credit score improves the chances of a country to borrow funds from foreign sources at a cheaper rate – from Malaysian investors particularly, in the case of this development.

The Philippines’ rating in RAM’s regional scare also received an upgrade to “seaAA3(pi)”, due to the country’s “superior capacity to meet its financial obligations.” RAM Ratings said that the government has “made some headway” in its “Build, Build, Build” infrastructure program, with 35 of 75 priority projects already approved for implementation.

Esther Lai, RAM’s Head of Sovereign Ratings, said that “while there are execution challenges to the infrastructure push, the shift in the government’s budgeting framework from obligation-basis to cash-basis next year should help address underspending issues.”

The Department of Budget and Management (DBM) submitted to Congress a P3.757-trillion spending plan for 2019 last July, which requires all agencies to spend their funds within the year, plus a three-month extension for payment.

A recent meeting with leaders of the House of Representatives yielded an agreement to extend the payment period for infrastructure projects by three more months, or a total of six months after the end of the fiscal year.

This is expected to end underspending, and ensure prompt delivery of state-funded projects, coming from two-year validity of budgets in the past years under the obligation-based system.

A few House leaders have questioned the shift in the budget system ahead of the May 2019 mid-term elections, saying that they were amenable to the shift in 2020.

Other recent reforms signed by President Rodrigo R. Duterte into law include the Philippine ID system, and the Ease of Doing Business Act.

Malaysian credit analysts also said that despite the slowdown of economic growth and surging inflation, the Philippines’ fiscal position and investor appeal remains intact, and that these setbacks in the economy are “manageable and transitory”.

The country’s gross domestic product (GDP) eased to six percent in April-June, which is slower than the first quarter’s downward-revised 6.6%, and last year’s 6.6%. Inflation surged to a nine-year-high of 5.7% last July, that pushed the seven-month pace to 4.5%, which is well above the 2-4% target.

RAM Ratings said that the strong inflow of foreign direct investments, which hit a record $10 billion in 2017, and are on track for a fresh banner year in 2018, could help fill in the growing trade deficit that has been fueled largely by heavy importation of capital equipment for business expansion.

“This reflects investor optimism over the country’s growth potential as well as the continuous passage of business-enhancing reforms,” said RAM Ratings, even as it mentions that the Executive-legislative differences over the second tax reform package “could hold back future investments.”

A measure currently waits plenary approval at the House of Representatives, which seeks to gradually cut corporate income tax rates to 25% from 30%. The foregone revenues were supposed to be offset by removing redundant tax incentives. However, the House has stonewalled on this segment of the package, warning that it could scare investors away. This leaves the package in a revenue-negative mode, despite being initially designed by the FInance department to be revenue-neutral.

Analysts of Fitch Ratings and Moody’s Investors Service has warned two weeks ago that watering down this package risks slowing the momentum of progress in state revenues and infrastructure spending.

Despite this, RAM Ratings expects a 6.5% growth this year. Even if it is below the government’s goal of 7-8%, it is still faster compared to the projected expansion of other Asian economies.

This latest rating upgrade affirms the Duterte administration’s thrust to boost the “economic competitiveness” of the Philippines by pursuing fiscal reforms, according to Finance Secretary Carlos G. Domingues III.

This upgrade follows similar moves from Standard & Poor’s Global Ratings and Fitch Ratings, which both increased the country’s investment grade.

via Business World / Melissa Luz T. Lopez