Moody's assigns provisional (P)Baa2 rating to the Philippines' forthcoming global bond offering

Moody's Investors Service ("Moody's") has assigned a (P)Baa2 rating to the Government of the Philippines' US dollar bond offering maturing in 2041.

RATINGS RATIONALE

The Philippines' Baa2 government bond rating is supported by improvements in government finances with ongoing debt reduction. The country has also weathered weaker external demand with real GDP growth accelerating through 2015 on the back of stronger private consumption and government spending. As a net oil importer, the Philippines' has benefited from lower oil prices via lower inflation and a compression of its import bill that has supported the current account surplus.

The decline in Philippines' debt burden has coincided with improvements in fiscal management. Administrative reforms in key revenue-collecting agencies have led to revenue growth in excess of nominal GDP growth for a fifth consecutive year in 2015. Although public spending has accelerated over the past year, the fiscal deficit remains under the targeted level of 2% of GDP and remains narrower than that of its rating peers.

Against the current backdrop of volatile global capital flows, external liquidity risks for the Philippine government are limited. It has become less reliant on external sources of financing due to the stable funding base provided by ample onshore liquidity. However, the proportion of government debt denominated in foreign currency remains higher than that for many similarly rated peers, although this ratio has fallen in recent years.

The Philippines' healthy external position is likely to remain intact with foreign exchange reserves currently exceeding external debt. The current account continues to be bolstered by remittance inflows from overseas Filipinos and services exports, particularly from the business process outsourcing sector. But the outlook for remittances is clouded by slowing economic growth in key source countries, including those in the Middle East and Asia.

Credit constraints include low per capita income and revenue mobilization, which remains one of the weakest among investment grade countries. Moreover, the main challenge facing Philippine policymakers is sustaining the improvement in governance through the political cycle as general elections are held later this year.

Nevertheless, the central bank has continued to bolster its strong track record of maintaining price and financial stability, contributing to favorable operating conditions for the country's banking system.