Philippines' Debt Rating Outlook Raised by Moody's

Five-hundred Philippine peso notes are displayed at a currency exchange in Manila on Nov. 6, 2007. Photographer: Nana Buxani/Bloomberg News

By Clarissa Batino and Francisco Alcuaz Jr.

Jan. 25 (Bloomberg) -- The Philippines' debt rating outlook was raised to positive by Moody's Investors Service, which cited the nation's improving economy and a narrowing budget deficit.

The outlook on the nation's 3.8 trillion pesos ($93 billion) of debt was raised from stable, Moody's said today in a statement. Moody's B1 rating on the Philippines is four levels below investment grade, the same as Cambodia, Pakistan and Uruguay, and one level below Indonesia.

The Philippines, experiencing its fastest economic expansion in at least two decades, is scheduled to balance the budget this year, freeing up funds to build roads and schools.

``Improved macroeconomic conditions and fiscal performance are mutually reinforcing each other,'' Moody's Senior Vice President Tom Byrne said in the statement. ``Low inflation has anchored inflationary expectations, despite upward pressure from high international food and oil prices.''

Peso and government bonds rose before the announcement, and will probably extend their gains, said Michael Calleja, vice president of treasury at Bank of the Philippine Islands in Manila. ``Government bonds and the currency will benefit as investors perceive the Philippines to be less risky,'' he said.

The Next Challenge

Moody's cut the Philippines' debt rating by two levels to B1 in Feb. 2005, on concern the government couldn't raise revenue and curb debt. The government approved a value-added tax change later that year, helping slash the budget deficit to 64.8 billion pesos ($1.6 billion) in 2006 from 146.8 billion pesos in 2005. The deficit peaked at 210.7 billion pesos in 2002.

``This is deserved,'' said Edward Teather, an economist at UBS AG in Singapore, though an upgrade of the sovereign rating ``is going to involve a lot of hard work.''

Standard & Poor's and Fitch Ratings have a stable outlook on Philippines' debt rating.

``The next challenge is to further intensify our efforts to improve policy and sustain high growth, lower inflation, a better fiscal position and a stronger financial system,'' Philippine central bank Deputy Governor Diwa Guinigundo said today in an e- mail.

For the rating to improve, the government has to demonstrate ``continued commitment to fiscal consolidation, through a stronger revenue effort, expenditure restraint'' or both, Moody's Byrne said.