Purisima calls for another Philippines upgrade

The country is mulling a dollar bond before elections in 2016, the head of the department of finance tells FinanceAsia.
Cesar Purisima
Cesar Purisima

The Philippines is calling for an improvement to its credit ratings from global ratings agencies given that its credit risk has declined over the last few months compared to its higher-rated peers.

“Even with the upgrades from all the credit rating agencies since Aquino became president, we are still underrated based on the implied bond ratings index based on the CDS [credit default swaps] of the country,” Cesar Purisima, head of the department of finance for the Philippines, told FinanceAsia in Hong Kong.

For example, the Philippines’ CDS — insurance-like contracts that protect banks, hedge funds and other investors against losses on an issuer’s debt — are lower than its higher-rated Asian peers such as Malaysia and Thailand. The lower the CDS, the lower the cost is to insure a sovereign's debt against non-payment for five years. 

According to Bloomberg data, the Philippines — rated Baa2/BBB/BBB- by Moody’s, Standard & Poor’s and Fitch respectively — has a five-year CDS of 95.5, while A3/A-/A- rated Malaysia and Baa1/BBB+/BBB+ rated Thailand have CDS levels of around 128 and 112 respectively as of February 10.

Aa3/AA-/A+ rated China, meanwhile, is hovering around 94, which is relatively close to the Philippines, while Baa3/BB+/BBB- rated Indonesia is at 156.

“Fitch has given us the lowest rating among the three global rating agencies but we believe that ultimately they will see the light,” said Purisima.

The Philippines won a one-notch credit rating upgrade to Baa2 from Moody’s last December and from S&P to BBB last May, a year after it was raised to investment grade. Fitch upgraded the sovereign to investment grade in 2013.

The country has also shown itself more capable of standing up to "global pressures" affecting other emerging markets, such as the fall in oil prices and the slowing of China's growth, Moody’s said in a report in December.

The Southeast Asian country has made an effort to prudently manage its debt position, notably its reliance on foreign debt, since President Benigno “Noynoy” Aquino III came to office in 2010. This has helped boost its credit ratings.

Last year, domestic debt rose to P3.8 trillion ($85 billion), up 2.3% from the P3.7 trillion seen in 2013, the Department of Finance reported on Monday. External debt, meanwhile, reached P1.915 trillion in 2014, down 1.7% from the P1.948 trillion posted in 2013.

“We are sticking to what we have been doing in the past in the five years, which is to borrow from the domestic market,” said Purisima. “This reduces our vulnerability to external events.”

Nonetheless, the sovereign is committed to keeping its presence in global debt markets, more often than not, on a yearly basis.

This year, the Philippines was the first Asian sovereign to raise a bond. As part of the sovereign’s liability management programme, it priced a $2 billion 25-year offering on January 7, coming with a switch tender offer — the country buys back a series of existing bonds at a specified bid price and replaces them with the new paper issued.

This not only gives investors the option to sell their holdings of existing debt but also enables the issuer to reduce its cost of funding as well as generate substantial demand for the cash portion — the part of the bond that is not being tendered.

“Our average foreign debt maturity is about 11 years and our interest rates are going down,” said Purisima, adding that the Philippines’ interest expense as a percentage of the budget has declined to approximately 15% from 20% when President Aquino came to office.

Purisima said that the country is mulling another dollar-denominated bond issuance within the next 12 months, citing the elections as a major consideration as to when it would come to market.

The Philippines election is set for May 9 next year, with campaigning beginning in January.

The sovereign has recently shed its image as one of the weakest economies in Southeast Asia, posting 7.2% growth in 2013.

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