Philippines receives S&P Investment Grade Rating; Beats queuing Indonesia

Standard and Poor Upgraded the Philippine Credit Rating to Investment Grade May 2, 2013

The Philippines overtook Indonesia to win an investment grade today from Standard & Poor's, as President Benigno Aquino outshines Susilo Bambang Yudhoyono in improving government finances and spurring growth.

The rating on the Philippines' long-term foreign-currency- denominated debt was raised one level to BBB- from BB+, with a stable outlook, S&P said in a statement today. In contrast, the assessor revised its outlook on Indonesia's BB+ rating to stable from positive.

"The upgrade on the Philippines reflects a strengthening external profile, moderating inflation, and the government's declining reliance on foreign currency debt," S&P said. "In our assessment, the stalling of the reform momentum in Indonesia and a weaker external profile have diminished the potential for an upgrade over the next 12 months," it said separately.

Aquino's drive to transform the nation into one of the region's fastest-growing economies is gaining strength, with the government forecasting record investment pledges this year as companies including Murata Manufacturing Co. expand. In Indonesia, President Yudhoyono has delayed cutting fuel subsidies that have drained government finances even as he tries to allocate more funds to infrastructure spending.

"For the Philippines, this is yet another confirmation that Aquino's reforms have borne fruit which would help in attracting not just short-term flows, but long term direct investments," said Santitarn Sathirathai, a Singapore-based economist at Credit Suisse Group AG. "The rating momentum for Indonesia is moving in the wrong direction."

Capital Inflows

The peso climbed to a three-week high of 41.055 per dollar, reversing earlier losses. It is the biggest gainer in the past 12 months after the Thai baht among 11 Asian currencies tracked by Bloomberg. The Philippine Stock Exchange Index (PCOMP) advanced 0.3 percent before the announcement after surging to a record in April. The Jakarta Composite Index fell 1 percent.

Higher ratings may boost capital inflows into the Philippines and prompt the central bank to add to measures to curb asset-bubble risks. Bangko Sentral ng Pilipinas last month cut the rate it pays on special deposit accounts for a third time this year, while keeping the rate it pays lenders for overnight deposits at a record-low 3.5 percent.

BSP will remain vigilant against risks associated with greater inflows, Governor Amando Tetangco said today.

Corruption Fight

Aquino has increased state spending and narrowed the budget deficit while seeking more than $17 billion of infrastructure investments to spur growth to as much as 7 percent this year. The Philippine economy, which was more than twice the size of Malaysia and 10 times bigger than Singapore's in 1960, expanded 6.8 percent in the fourth quarter.

Aquino has taken on the Catholic Church with a bill to provide free contraceptives to the poor, arrested his predecessor on graft charges, and ousted the country's top judge for illegally concealing his wealth. Transparency International raised the country's ranking on its annual corruption index last year to 105, higher than Indonesia at 118.

"The investment grade rating is another resounding vote of confidence," Finance Secretary Cesar Purisima said. "The government will continue to focus on infrastructure development, on creating a larger fiscal space to support social investments, and on further opening up the economy."

Fitch Ratings was the first to upgrade the Philippines to investment grade in March. Moody's Investors Service rates the nation one step below.

Ratings changes aren't always followed by investors. French bonds and U.S. Treasuries both made gains after the countries were stripped of their AAA credit ratings, in a signal that downgrades may have little bearing on borrowing costs.

Little Bearing

Almost half the time, government bond yields fall when an action suggests they should climb, or they increase even as a change signals a decline, according to 38 years of data compiled by Bloomberg.

Yudhoyono said this week he will only increase fuel prices after Parliament approves compensation programs for the poor, a move that could delay efforts to contain a budget deficit that may be more than twice as much as estimated without subsidy cuts. Failure to reduce subsidies last year drained government finances and led to a record current-account shortfall, hurting the rupiah as foreign investors lost confidence.

S&P said it may raise the country's rating if the fuel reforms are finalized, the state budget is improved, or if structural reforms boost economic growth. The assessment may be lowered if renewed fiscal or external pressures are not met with "timely and adequate policy responses," S&P said.

Bloomberg News

To contact the reporter on this story: Karl Lester M. Yap at kyap5@bloomberg.net To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net

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