Moody’s to assign Ba3 with a stable outlook to upcoming Philippine peso global bond

Singapore, January 05, 2011 — Moody’s Investors Service will assign a Ba3
rating to the Philippines government’s forthcoming Philippine
peso-denominated global bond issuance. Non-resident holders of these
bonds may be exempt from taxation under prevailing Philippine laws,
rules, and regulations. The proposed rating is subject to receipt of
final documentation, the terms and conditions of which are not expected
to change in any material way from the draft documents reviewed by
Moody’s.

“The rating is well anchored by the continued strength in the sovereign’s
external payments position and a favorable outlook for domestic-demand
driven economic growth. In addition, the rating is supported by a
relatively sound and liquid banking system, which does not pose
foreseeable risks to the government’s balance sheet,” says Christian de
Guzman, a Moody’s Assistant Vice President and the lead sovereign analyst
for the Philippines.

Robust overseas remittances over the past few years have coupled with
sizeable portfolio inflows more recently to boost foreign exchange
reserves to a historically high level, providing the economy and
government finances a significant buffer against external shocks.

The stable outlook is also influenced by the continued ability of the
country’s central bank to anchor inflationary expectations under its
formal inflation-targeting framework. Inflation fell close to the lower
bound of Bangko Sentral’s target range of 3.5 to 5.5 percent for 2010 and
is expected to remain well within the range of 3.0 to 5.0 percent for
2011.

“The sovereign’s Ba3 rating, however, also reflects continued weaknesses
in revenue collection, as well as a large public-sector debt overhang,
relative to its rating peers,” notes de Guzman. “However, recent fiscal
developments suggest a possible return to fiscal consolidation through
intensified tax enforcement and expenditure restraint.”

The national government is likely to meet its deficit target for 2010,
but it remains unclear whether its current tax compliance efforts can
effect a structural improvement in revenue performance. Moreover, the
Philippines has a larger stock of debt and devotes a larger share of its
revenues towards interest payments than the median among its Ba-rated
peers. The authorities’ continued commitment to resume fiscal
consolidation will be crucial to supporting the rating outlook and augur
well for the Philippines’ long-term economic fundamentals.

The last rating action on the Philippines was taken on July 23, 2009,
when Moody’s upgraded the sovereign bond rating to Ba3 from B1.