Moody’s affirms Philippine ratings at Baa2

July 20, 2018

Moody's Investors Service Friday affirmed the Philippines' long-term local currency and foreign currency issuer and senior unsecured debt ratings at Baa2 and maintained the outlook at stable.

It expects that growth will remain robust and that the Philippines' fiscal metrics will strengthen somewhat as the government continues to make progress on its socioeconomic reform agenda.

But these trends are likely to fall short of bringing the Philippines' credit profile in line with higher-rated countries, said Moody's.

Policymakers face challenges in managing the current inflationary pressures. In addition, domestic political developments and prospective changes to governance frameworks, including a shift to a federal form of government, present downside risks to the country's institutional and fiscal profile, Moody's said.

The Philippines' Baa2 rating reflects a number of credit strengths, including limited vulnerability to external shocks, balanced by longstanding structural credit constraints resulting from some of its economic, fiscal and institutional features.

Large foreign exchange reserves and low economy-wide external debt contribute to macroeconomic stability. More generally, relatively low reliance on either foreign sources of income or financing insulates the Philippines from the direct impact of abrupt changes in the global macroeconomic and financial environment.

The government has made progress on several facets of the socioeconomic reform agenda that was unveiled at the outset of the term of President Rodrigo Duterte.

In particular, tax reform has complemented faster implementation of infrastructure development. As a result, Moody's expects a broadly stable government debt burden at moderate levels, below 40% of GDP, improving debt affordability, and sustained high GDP growth.

The first package of the Tax Reform for Acceleration and Inclusion (TRAIN), effective at the beginning of 2018, represents a comprehensive overhaul of the tax code and has had a pronounced impact on the government's revenue performance in the first half.

Moody's estimates that government revenue will rise to 16.2 percent of GDP in 2018 and 16.7 percent in 2019, from 15.6 percent last year, largely as a result of TRAIN1. DMS