Moody's: Philippines rating resilient to slowing growth in Asia, outlook stable

Moody's Investors Service says that the Philippines' Baa2 government bond rating reflects the resilience of its economy to the current headwinds buffeting neighboring countries and emerging markets as a whole.

Further, the stable outlook reflects Moody's expectation that positive economic and fiscal trends will be sustained over the next 1-2 years. However, these will be balanced against the persistent weaknesses in the sovereign's credit profile.

Moody's conclusions were contained in its credit analysis on the Philippines, and which examines the sovereign in four categories: economic strength, which is assessed as "high"; institutional strength "moderate (+)"; fiscal strength "moderate"; and susceptibility to event risk "low".

The report constitutes an annual update to investors and is not a rating action.

Moody's report notes that domestic demand has cushioned the effects of weaker exports amid slowing growth in much of the Asia Pacific region. At the same time, the external risks to the government's external liquidity and funding conditions arising from the prospective tightening by the US Federal Reserve are manageable.

Internally, although political noise has increased ahead of general elections next year, Moody's does not expect the improvements in institutional strength to reverse. Reform momentum has been largely sustained, leading to improved assessments of competitiveness and governance.

However, bottlenecks in fiscal expenditure continue to weigh on growth and could threaten the government's capacity to meet its goal of increasing infrastructure spending to at least 5% of GDP by 2016. Nevertheless, the government's Public Private Partnership Program has gained some traction, following a slow start at the outset of the Aquino administration.

Moody's expects government debt as a share of GDP to fall for a fifth consecutive year in 2015 as fiscal deficits remain narrower than budgeted. Both the public and private sector have also relied less on cross-border sources of financing in recent years, leading to improved external debt ratios and lowering the country's susceptibility to volatile capital flows.

Nevertheless, the government's revenue--as measured against GDP--is low and debt affordability remains weak when compared to investment-grade peers, although both ratios have improved in recent years, says the rating agency.

The relatively high proportion of government debt denominated in foreign currency renders the Philippines susceptible to currency risks, although this has also improved recently.

In addition, the country's GDP per capita is among the lowest for investment-grade countries.