Moody's Investors upgrade Philippine credit rating to Ba1; Gross Reserves at $81.88-Billion level

The Philippines' debt rating was raised to the highest level since the start of 2004 by Moody's Investors Service, bringing the Southeast Asian nation one step away from investment grade. The peso and bonds rose.

 

The new credit rating upgrade for the Philippines to a notch below investment grade, aligning its assessment of the country's debt quality with those of Fitch Ratings and Standard & Poor's Ratings Services for the first time since April 2003, that brings the Philippines on par with Turkey and Hungary. The ratings outlook is stable.

 

"The writing is clearly on the wall," said Roberto Juanchito Dispo, president of First Metro Investment Corp., one of the arrangers of the government's record retail bond sale this month. "The Philippines is definitely on its way to becoming investment grade in due course. This will bring numerous tangible economic benefits to the country."

 

Philippine officials welcomed Moody's action, which came 16 months after Fitch and four months after S&P lifted their ratings to just one step below investment grade. Fitch and S&P have stable outlooks on their assessments.

 

President Benigno Aquino has won ratings upgrades as he takes steps to contain the budget deficit and lure foreign investors to spur expansion in the $225 billion economy. Standard & Poor's in July raised the debt rating to BB+, one level below investment grade, citing improved prospects for growth, while an agreement with Muslim rebels this month to end a four-decade insurgency in the mineral-rich south has boosted the country's appeal.

 

Since S&P, Moody's and Fitch started rating the Philippines in 1993, 1995 and 1999, respectively, the country hasn't moved out of junk level. Earlier this month, S&P said that historically it takes around 2½ years before a BB+ rated country cracks investment grade, which for the Philippines could mean late in 2014 or early 2015.

 

Jeffrey Ng, an economist with Standard Chartered Bank, said that the Philippines could win an investment-grade rating if it pursues further fiscal reforms, including passing pending tax measures in Congress.

 

"We have been calling for investment grade around 2014. The country's strengths are in its economic fundamentals and stable political environment; the government is still working on investment and fiscal consolidation," he said.

 

Aninda Mitra, an economist with ANZ, said a demonstrable record of sustained economic growth, especially if it is investment-driven, would help the Philippines graduate from the junk-level rating.

 

"Moreover, the passage of the sin tax bill, which broadens the fiscal base for heightened spending on infrastructure and health, would also set the structural basis for further upgrades to the investment-grade space," Mr. Mitra said.

 

The Senate is now reviewing its version of the so-called sin tax bill—a measure that would increase excise taxes on cigarettes, liquor and beer—that as currently proposed will generate additional revenue of around 15 billion Philippine pesos ($363 million), just a quarter of what the government was seeking and half that of the revenue expected from the version of the House of Representatives.

 

Peso Gains

 

The peso erased losses, gaining 0.1 percent to 41.177 per dollar as of 2:06 p.m. in Manila, according to data from Tullett Prebon Plc. It is the top gainer this year among the 11 most- widely traded Asian currencies tracked by Bloomberg. Philippine dollar-denominated bonds maturing in January 2037 rose after the upgrade, halting a four-day slide. The yield on 5 percent bonds fell one basis point, or 0.01 percentage point, to 3.78 percent, according to data compiled by Bloomberg.

 

"Improved economic performance and continued fiscal revenue buoyancy in the face of deteriorating global demand" led to the upgrade, Moody's said in a statement. "In contrast to similarly rated countries, the country is poised to record a combination of faster growth, lower inflation, exchange rate appreciation, and an increase in foreign exchange reserves, while maintaining trend debt consolidation," it said.

 

Aquino is taking steps to reduce corruption while seeking more than $16 billion of investments in roads and airports to spur expansion to as much as 7 percent in 2013 to create jobs and reduce poverty. Gross domestic product rose 5.9 percent in the second quarter from 6.3 percent in the previous three months, which was the fastest expansion in Southeast Asia.

 

"This is another affirmation of the economic agenda of President Aquino," Finance Secretary Cesar Purisima said in a mobile text message today. "Good governance indeed is good economics. We will continue to focus on the fundamentals of fiscal sustainability and business environment enhancement."

 

Beneficial Effects

 

Bangko Sentral ng Pilipinas last week cut its overnight borrowing rate by 0.25 percentage point to a record 3.5 percent, bringing the total reduction in 2012 to 1 point. An investment- grade rating is possible next year, Governor Amando Tetangco told reporters today.

 

"Over the longer term, the landmark peace agreement signed between the government and the Moro Islamic Liberation Front may have wider beneficial effects on investment and economic growth in Mindanao -- the country's largest island -- which has untapped agricultural and mining potential," Moody's said.

 

The central bank lowered its inflation forecast for this year to 3.3 percent from 3.4 percent, and to 3.9 percent from 4.1 percent next year. Inflation unexpectedly eased in September to 3.6 percent from a year earlier.

 

Today's upgrade contrasts with recent actions on other Asian nations. Vietnam's government bond rating was cut last month by Moody's for the first time since 2010 as the nation grapples with rising bad debt in its banking system that has hurt growth, while S&P said this month India may lose its investment-grade rating within the next 24 months if growth slows and political opposition to policy overhauls increases.

 

"A stable outlook signals possible further upgrades in the future," central bank Deputy Governor Diwa Gunigundo said in a mobile text message. "The challenge for us is to sustain what we have been doing in strengthening the macro economy and enhancing good governance."

 

The local financial markets largely ignored Moody's rating upgrade, with the Philippine stock market's main performance barometer closing 0.1% lower, while the U.S. dollar was a tad higher against the peso.

 

Finance Secretary Cesar Purisima, who had consistently argued that credit rating companies are trailing capital markets in rating Philippine debt, said that Moody's action is a recognition of "the significant progress that the Aquino administration has undertaken to improve the country's economic fundamentals."

 

He said that with the government's commitment to macroeconomic stability, enhanced fiscal stability and investment growth, "investment grade will definitely come sooner rather than later."

 

Philippines foreign reserves reach historic $81.88-Billion level in Sept 2012

 

Philippine foreign exchange reserves reached a new record high of $81.88 billion as of end-September, Bangko Sentral ng Pilipinas reported Friday, saying its dollar-buying operations in the market could still boost international reserves during the rest of the year.

 

The gross international reserves level was equivalent to 6.5 times of Philippines foreign debts, and enough to pay for about a year of the country's import requirements, the Bangko Sentral noted.

 

In August, the country's foreign reserves totaled $80.73 billion, and were recorded at $75.17 billion as of end-September 2011.

 

In a statement, Bangko Sentral revealed its dollar-buying operations – to help rein in a stronger peso against the US dollar – boosted September's foreign reserves.

 

The central bank would stay in the foreign exchange market buying dollars, especially if the peso continues to bear the brunt of speculative money in the stock market, said Bangko Sentral Governor Amando Tetangco Jr.

 

"If the peso would continue to appreciate because of temporary investments or hot money, the BSP will participate in the market and try to minimize strong fluctuations," he said.

 

Bangko Sentral would have no problem letting the peso appreciate if the pressure comes from long-term foreign direct investments, Tetangco added.

 

Wall Street Journal, Bloomberg, GMA News

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China Invaded Palawan’s Mischief Reef right after Philippine Senate Ousted US base in Clark

The Philippines-China Disputes In The South China Sea: The US Factor – Analysis

 

The Philippines' decision to engage the US in an attempt to balance against China's growing military power, especially in the disputed South China Sea, is anchored on a bitter episode in the past – China's occupation of Philippine-claimed Mischief Reef in 1994, two years after the removal of the US bases. To merit the distinction of being a responsible power, China has to reassure the Philippines that its rise to power will usher benefits and opportunities for the region and that China's ascendancy will not pose as a threat to the security of its neighbours.

 

United States involvement or attempts by the US to get involved in the South China Sea (SCS) disputes is seen by some as a major factor in intensifying tensions in one of the world's most critical regional flashpoints. China, as well as some ASEAN countries, does not welcome US participation in resolving the impasse over conflicting maritime and territorial claims in the strategic semi-enclosed sea. As such, countries like the Philippines, as well as Vietnam, have been perceived by some as aggravating the already tense situation by openly inviting US intervention and internationalizing what some see as a purely regional matter. This argument had long been played and, while it may make sense, certain historical circumstances raise questions over its indisputability.

 

As a long time US colony, the Philippines hosted the largest US bases in East Asia, enabling Washington to project naval and air power in the then Far East, as well as in the Pacific. This made the Philippines a necessary military target for Japan during World War II. These US bases continue to operate even after the country's independence, providing the US with the wherewithal to check the spread of communism in the region, in turn providing external security for the Philippines. Unfortunately, this reliance on the external defense blanket provided by the US also stunted the growth of a self-reliant national defense establishment for the Philippines, which was exposed with the removal of the US bases in 1991.

 

The Senate decision leading to the termination of the US bases agreement was passed with a rather slim margin. The issue of sovereignty and complete independence from the US were among the principal rationales cited by solons who voted for ending what many consider as the last vestiges of American colonialism and control over the Philippines. This was a low point in Philippine-American relations, and it would take about two decades to revitalize ties once more, with Philippine support for the US-led war on terrorism in the aftermath of 9/11.

 

Looking back further in time, the end of the Cold War following the dissolution of the Soviet Union in 1991 was welcomed by many with optimism. Vietnam pulled out of Cambodia in 1989, the Russians began gradually moving out of Vietnam in 1990 and peace in Indochina was within sight. However, what may be true in land is not true for the waters, as clashes in the South China Sea intensified with China and Vietnam exchanging fire in 1974, 1988 and 1992.

 

The discovery of oil and gas in the area only added fuel to the disputes. China became a net oil importer in 1992 and both Beijing and Hanoi began issuing exploration contracts in waters they both claim. In February 1992, Beijing passed the Law on Territorial Sea and Contiguous Zone laying claim to 80% percent of the SCS. Taiwan, Philippines, and Malaysia also began occupying features, if not fortifying or garrisoning already occupied features in the SCS. Seeing the writing on the wall, ASEAN issued a Declaration on the South China Sea in 1992 in Manila.

 

Both Vietnam and China expressed support for the Declaration. In addition, Indonesia, with support from the Canadian International Development Agency, also began informal workshops in managing potential conflicts in the SCS in the 1990s drawing participants from claimant, as well as non-SCS claimant, countries.

 

However, despite efforts to stem the brewing tensions in SCS, the Mischief Reef (locally known as Panganiban Reef in the Philippines) occupation happened in 1994. This was a significant watershed in Philippines-China relations. It marked the first time that China occupied a feature claimed by an ASEAN country, the Philippines (Vietnam only became a member of ASEAN in July 1995). It was also the first time that China physically challenged the claims of another claimant besides Vietnam.

 

A Filipino fisherman held by the Chinese in the said Reef for weeks informed Philippine authorities about the occupation. Was it to teach the Philippines a lesson for being a US proxy or was it precisely because of the absence of a US deterrent that China was emboldened to make such a move, knowing the state of the Philippines' armed forces? Irrespective of the answer, this incident led to a re-assessment of the Philippines' perception of a China threat; particularly with respect to the Kalayaan Island Group. It also gave momentum to the country's defense modernization. Finally, the Mischief Reef incident also raised doubts as to the correctness of removing the US bases at a time when the country's military capabilities are still weak.

 

Whether the occupation of the Mischief Reef was deliberate policy from the top, an initiative of some rogue PLA Navy elements operating without Beijing's blessing or the adventure of Chinese fishermen from Hainan, the fact remains that what started ostensibly as fishermen's shelters in 1994 eventually became a fortified military base by 1998. This is despite protests and calls for the removal of the said structures aired by Manila and the signing of a bilateral code of conduct between Manila and Beijing in 1995.

 

In sum, it became apparent that by 1991, as signaled by the termination of the US bases, the Philippines began developing a more independent foreign policy. China could have seized this opportunity to constructively engage a country that it had long perceived as a bulwark of US imperialism in Asia. Beijing could have even replaced the US as the dominant partner for the Philippines. The presence of ethnic Chinese in the Philippines, which is among the most tolerated and economically prosperous overseas Chinese communities in the region, could have served as a bridge towards this end.

 

But far from encouraging the Philippines' tentative steps, China's action, as exemplified by the Mischief Reef occupation, only served to reinforce a negative image of China to many Filipinos, some of whom discarded the stories about MV Karagatan and other arms shipments to communist NPA rebels by China as hoaxes. Hence, the Mischief Reef episode, instead of making the Philippines accept the idea of a Pax Sinica in the region, produced the very effect that China detests – closer US-Philippine relations and the prospect of Manila being used as a proxy to contain China. A recent SWS survey revealed that many Filipinos have little trust in China. As many Filipinos remain critical of US military presence in Philippine soil, they would surely be observing the next Chinese moves, eager to see the sincerity of China's charm.

 

Eurasia Review

 

About the author:

Lucio Blanco Pitlo III

Lucio Blanco Pitlo III is an MA Asian Studies student from the Asian Center, University of the Philippines. His commentaries have been published in Forging a New Philippine Foreign Policy, S. Rajaratnam School of International Studies, East Asia Forum, and Institute for Peace and Conflict Studies. His research interests include Philippine-China relations, ASEAN-China relations, territorial and maritime disputes, and energy security. Lucio may be reached at lucioatacup@rocketmail.com

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