The tight spreads of the Philippines’ offshore bond issuances and its credit rating upgrade to its highest ever rate of ‘BBB+’ in 2019 underline the deepening investor confidence following the game-changing reforms carried out by President Duterte to further energize the economy and spread its benefits across all sectors, including marginalized Filipinos.

Standard & Poor’s (S&P) announced last April its upgrade of the Philippines’ long-term credit rating from ‘BBB’ to ‘BBB+’, which is just a notch away from the coveted “A” rating.

This latest upgrade has put the Philippines above countries like Italy and Portugal and just a step below countries like Spain and Malaysia. It also placed the Philippines on the par with countries like Mexico, Peru and Thailand.

Such a vote of confidence from one of the world’s most reputable credit rating agencies is a recognition of “President Duterte’s unwavering commitment to bold reforms and sound economic policies as embodied in the 10-point Socioeconomic Agenda of the administration and his strong political will to get these tough initiatives done at the soonest possible time,” Finance Secretary Carlos Dominguez III said.

“These socioeconomic reforms being put in place by President Duterte are meant to sustain the growth momentum, attract investments, create jobs and spell a decent life for every Filipino,” he said.

National Treasurer Rosalia De Leon pointed out that “the upgrade is a recognition of our sound policies on liability management. We have kept our debt in check—even as we invest more in infrastructure and social services. We are committed to fiscal discipline, and this makes the Philippines a truly creditworthy sovereign in the eyes of the international financial community.”

S&P attributed the improvement in the Philippines’ rating to “its “above-average economic growth, a healthy external position, and sustainable public finance.”

It said the stable outlook on the rating, “reflects our view that the Philippine economy will maintain its momentum over the medium term, in combination with contained fiscal deficits and stable public indebtedness.”

The higher ‘BBB+’ rating tells investors that it is safe to do business in the Philippines and that the country is highly capable of paying its debts, Dominguez said. “This enables the country to borrow at lower costs, and spend the money it saves to bankroll its priority programs such as infrastructure, education and health care.”

For the private sector, he said this means being able to borrow at lower rates to finance their business expansions. Ordinary Filipinos likewise benefit because banks would be able to lend money to them at lower interest rates, he added.

“All of these will translate into larger investments and more jobs for Filipino workers. So, as you see, it is not just about getting upgrades or affirmations. It is also about upgrading the ordinary Filipino’s life,” Dominguez said.

Dominguez said S&P’s upgrade “summarizes all our efforts to maintain fiscal discipline, contain inflation, build a business-friendly market, and achieve the highest international reserves ever,” which stood at a record US$86.39 billion as of end-November 2019. “This strong position has helped keep the local currency stable,” he said.

S&P said it may raise its ratings further over the next two years “if the government makes significant further achievements in its fiscal reform program, or if the country’s external position improves such that its status as a net external creditor becomes more secure over the long term.” Another factor is a determination of a marked improvement in the Philippines’ “institutional settings.”

Dominguez said this means that the prompt approval of the remaining packages of the comprehensive tax reform program (CTRP) plus other pending economic reforms, such as the amendments to the Public Services Act (PSA), Retail Trade Act (RTA) and the Foreign Investments Act (FIA), will secure for the Philippines an “A” credit rating in two years’ time.

He said the government is stepping up the implementation of these reforms in 2020 and keeping a low debt-to-GDP (gross domestic product) ratio as part of its “Road to A” initiative aimed at securing the coveted “A” rating, which is accorded only to the world’s most stable economies.

“We have to take certain action to do this. Among them is our tax reform program. In order to increase our tax revenue as a percentage of GDP, that’s very important. Also to make sure that our GDP is growing faster than our loans so that we don’t reach a 42 percent debt-to-GDP ratio,” he said in a recent interview.

Dominguez said the Department of Finance (DOF), Bureau of the Treasury (BTr), National Economic and Development Authority (NEDA) and the Bangko Sentral ng Pilipinas (BSP) are spearheading the efforts to secure an “A” rating, which is crucial in offsetting the impact of the preferential interest rates that the Philippines will lose once it ascends to upper middle-income country (UMIC) status by 2020.

“We mean to address the need for us to improve our credit rating because we’re going to lose our special interest rates, because we will be graduating already to UMIC status soon. We have to make sure the differentials in the interest rates will be reduced with the credit upgrade,” he pointed out.

On tax reform, the pending packages in the Congress are: the proposal to reduce the corporate income tax (CIT) rate and rationalize fiscal incentives to make these performance-based, time-bound, specifically targeted and fully transparent; reforms in the land valuation system; reforms in the financial sector to help develop the capital markets; and a general tax amnesty contingent on the lifting of bank secrecy for tax fraud cases and the automatic exchange of information among regulatory agencies.

He said that subject to favorable market conditions, the government intends in 2020 to price its foreign bond issuances even tighter given the credit rating upgrade, the prevailing negative benchmark yields and the expected easing from central banks as a counterweight to the weakening global economy.

In 2019, the Philippines continued to secure tight spreads as low as 32 basis points (bps) over benchmarks for its bond issuances relative to other countries such as Indonesia, Mexico and Colombia across currencies.

It obtained tight spreads for its inaugural renminbi (RMB)-denominated Panda bond float in 2018 and was received similarly during its return to the Samurai market that year.

The Philippines’ 10-year Global Bond issue at 3.75 percent last January amounting to USD1.5 billion was priced 110 bps above benchmark US treasuries, and tighter than an initial 130 bps guidance.

Its return to the European market after more than a decade with an 8-year EUR750 million (US$839.4 million) Global Bond float last May was priced at 70 bps above benchmark, which was the lowest-ever EUR yield for a sovereign issuer outside the European Economic Area.

The second issue of 3-year Panda bonds totaling RMB 1.46 billion (US$203.35 million) was priced at 32 bps last May, while the multi-tranche Samurai bonds amounting to 92-billion yen (US$857.2 million) had a weighted average spread of 37 bps when it was issued last August.

Finance Assistant Secretary Antonio Lambino II said “the tight spreads of these latest offshore bond issuances underlined investor confidence in the way the Duterte administration has soundly managed the country’s fiscal program.”

The government has issued global bonds in various foreign markets as part of its efforts to diversify funding sources for its aggressive investments in infrastructure and human capital development.

Dominguez said the Philippines’ expected rise to UMIC status in 2020, which is indicative of the capacity of the domestic market to support more enterprises, and the game-changing reforms that the Duterte administration will continue to carry out, will help sustain investor confidence in the economy.

He said the implementation of these game-changing reforms that will benefit all law-abiding Filipinos and businesses is a component of the three-fold strategy that the government has been carrying out to ensure that the Philippine economy remains among the fastest growing in the world.

The government will also focus on prudent fiscal management and a stable monetary policy to bolster macroeconomic strength, and an accelerated spending program on infrastructure and its people that will provide the highest returns in the short-run and well into the future, Dominguez said.

“We are doing the things we need to do. We are optimistic that the growth momentum will be sustained beyond the medium term. We seek to make our market more competitive and our economy more inclusive, in keeping with the ultimate goal of President Duterte to improve the lives of the Filipino people,” he said.

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