Philippine Finance Minister Says Moody’s, S&P Out of Step on Debt Ratings
Moody’s Investors Service and Standard & Poor’s should rate Philippine bonds at least one level higher given the nation’s improving debt ratios and tax revenue, Finance Secretary Cesar Purisima said.
“I really believe that at least those two are off line,” Purisima, 51, said in an interview in Manila yesterday. “We have a case to suggest to them that we should be at least a notch higher.”
The Philippines moved closer to its goal of winning an investment grade for the first time when Fitch Ratings raised its assessment last month to BB+, the highest junk rating and on par with Indonesia. Fitch said yesterday it was more likely to raise Indonesia. Moody’s said its Philippine rating was appropriate.
Purisima said his nation’s key financial ratios are “very close” to those of peer countries. Debt is 56.5 percent of gross domestic product, almost the same as 55.9 percent in India, which has an investment rating, based on data compiled by Bloomberg. In Indonesia, the ratio was 26 percent at the end of last year. The Philippines aims to narrow the budget deficit to 2 percent of GDP by the end of 2013, from a 4 percent level last year that was the same as India’s.
Investors demand an extra 127 basis points from the Philippines’ 4 percent dollar note due January 2021 over U.S. Treasuries, compared with 157 basis points for Indonesia’s 4.875 percent debt due May 2021, Royal Bank of Scotland Group Plc. prices show.
Window of Opportunity
Emerging-market nations from Brazil to Sri Lanka have won rating upgrades, highlighting the relative strength of developing economies amid soaring deficits in advanced nations. Greece’s debt is 144 percent of the economy, while Japan’s shortfall is equivalent to 8 percent of GDP.
The Philippine government last week completed a record peso bond exchange, extending maturities by an average of two years, freeing up cash to build roads and schools. This month, Purisima announced plans for the nation’s first exchange of dollar bonds into global peso notes to reduce its foreign debt burden. The yield on the 7 percent local-currency bond due January 2016 fell to 4.68 percent on July 8, from 6.35 percent on Feb. 28.
“This is a window for us to really reduce our risk profile as a country,” said Purisima. “Doing so will also improve our chances in our quest of getting investment grade. We want that as soon as possible. The sooner the better.”
Revenue increased 16 percent in the first five months, government data show, as President Benigno Aquino’s administration plugged tax leaks and tracked down cheats. The deficit, which reached a record 314.5 billion pesos ($7.3 billion) in 2010, was 9.54 billion pesos in the first five months, or less than 6 percent of the level a year earlier.
The Philippines’ sovereign rating was increased to Ba2 from Ba3 by Moody’s on June 15, two steps below investment grade. Standard & Poor’s in November last year boosted its rating to BB, also two notches below investment grade. Moody’s said the Philippines was suffering from weaker growth prospects than Indonesia’s.
“The growth momentum for Indonesia seems to be a lot stronger,” Moody’s assistant vice president Christian de Guzman said in an interview yesterday in Singapore. “Moody’s thinks the one-notch gap is justified for now.”
Aquino, 51, who completed his first year in office on June 30, must show a track record of keeping state finances healthy, as Indonesia’s President Susilo Bambang Yudhoyono, 61, did when he was first elected in 2004, de Guzman said.
“Much of the things being said about Yudhoyono are the things we say now about Aquino,” de Guzman said “He just got into office, there’s not much of a track record. In 2004, when Yudhoyono won the election, the debt to GDP was 55 percent. It’s right around where we see the Philippines at now.”
The Philippines must boost revenue, investment and economic growth to secure an increase in its credit rating, Andrew Colquhoun, the head of Fitch’s Asia-Pacific Sovereigns team said yesterday. Indonesia, Southeast Asia’s biggest economy, is likely to win investment grade before the Philippines, Fitch said yesterday.
The government estimates growth in the Philippines’ $161 billion economy may have quickened last quarter, following an expansion of 4.9 percent in the three months through March from a year earlier, which was the smallest gain since 2009.
The government will take its time to draw up a solid process for seeking bids on contracts for about $16 billion worth of roads, railways and ports, said Purisima.
Frankfurt-based Fraport AG helped build the Ninoy Aquino Airport Terminal 3, which was 98 percent complete in 2002 and supposed to open by the year-end. Former President Gloria Arroyo questioned the contract and the Supreme Court nullified it in 2004.
“There is such a rush to come up with projects already,” said Purisima. “We don’t want to be tempted into that, because if we don’t do it well, we will hurt the potential sustainability of the program. We want to make sure that everything we do is right and will withstand scrutiny.”
Five-year credit-default swap contracts on Philippine debt traded at 139 basis points yesterday, compared with 141 for Indonesia, according to data provider CMA which compiles prices quoted by dealers in the privately negotiated market. The contracts insure debt against non-payment, and traders use them to speculate on credit quality.
The finance minister also pointed to the nation’s balance of payments surplus, fuelled by remittances from overseas workers, and strong financial ratios at the nation’s banks as a reason for awarding the nation a higher rating.
“Purisima has to step up to achieve that goal,” said Junie Banaag, who helps manage $563 million at Manila-based First Metro Investment Corp. “Aside from maximizing the current tax base, Purisima has to create other sources of taxes. Expanding taxes will allow the government to cut the deficit and pursue infrastructure projects.”
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