Has the Philippines Gained from its Investment Grade Rating?

39th Philippine Business Conference and Expo 22 October 2013, Manila Hotel

WILHELMINA C. MAALAC Managing Director, International Sub-Sector

Outline of Presentation
A. Journey to Investment Grade Rating

B. Significance of Investment Grade Rating

C. Beyond Investment Grade

D. Policy Thrusts

At a glance: Philippines sustains economic improvements

Key Macro Indicators 2007-2011 Ave 2012 2013

Sustained growth momentum Manageable inflation Ample liquidity and credit supportive of economic activity

Real GDP growth (2000=100)

Headline inflation (2006=100) Domestic Liquidity (% of GDP)

4.7
4.8 48.0

6.6
3.2 49.0

7.5 (Q2)
2.8 (Jan-August) 51.8 (Jan-June)

Domestic Credits* (% of GDP)

48.4
3.8 16.3 4.0 8.4 31.7 9.8 -178.3 (-2.02%)

50.5
1.9 18.4 2.8 11.9 24.1 7.4 -242.8 (-2.3%)

51.1 (June)
2.8 (May) n.a. 4.2 (Jan-Jun) 11.9 (end-Sep) 21.8 (Jan-Jun) 8.3 (Jan-Jun) -104.5 (Jan-July) (-0.9%)

Non-performing loans (% of total loans) UBs and UKBs Sound and stable Capital Adequacy Ratio banking system (consolidated basis)** - UBs and UKBs Current Account Balance (% of GDP) GIR (in months of imports) Robust external profile External debt (% of GDP) External debt service burden (% of exports of goods, receipts of services & income) Deficit, in billion pesos Fiscal Performance (% of GDP)

*Computed using Net Domestic Credit (NDC) **Computation based on the combined reports of parent bank (head office and branches) and its subsidiaries engaged in financial undertakings but excluding insurance; also excludes trust department.

Journey to Investment Grade Rating

Investment grade rating upgrades boost investor confidence
Date Credit Rating Agency From To Outlook

27 March 2013

BB+

BBB-

Stable outlook

2 May 2013

BB+

BBB-

Stable outlook

7 May 2013

BBB-

BBB

Stable outlook

2 August 2013

BBB-

BBB-

Positive outlook

3 October 2013

Ba1

Baa3

Positive outlook

Credit Ratings - Mapping of Rating Scales

ROP is amongst a select group of Emerging Markets that have crossed the Investment Grade threshold
Credit Quality AAA AA+ AA AAA+ A ABBB+ BBB BBBBB+ BB BBB+ B BCCC+ CCC CCCCC C SD D Aaa Aa1 Aa2 Aa3 A1 A2 A3 Baa1 Baa2 Baa3 Ba1 Ba2 Ba3 B1 B2 B3 Caa1 Caa2 Caa3 Ca C D AAA AA+ AA AAA+ A ABBB+ BBB BBBBB+ BB BBB+ B BCCC+ CCC CCCCC C RD D Extremely strong Very strong Countries Singapore United States Korea Malaysia Thailand Brazil Philippines Vietnam

Investment Grade Ratings

Strong

Adequate

Less vulnerable

Noninvestment Grade Ratings

More vulnerable

Cambodia

Currently vulnerable Currently highly vulnerable Default Greece

Default

How ROP Achieved Investment Grade

Key factors to Investment Grade Rating
A confluence of factors helped the ROP secure an Investment Grade rating

1 2 3 4 5 6 7

External Balance Sheet Structural current account surplus with consistently robust remittances Large and growing foreign exchange reserves

Gains in Governance and Supportive Political Backdrop Political stability on both national and regional level Core focus on good governance and weeding out corruption

Reform Momentum Unprecedented levels of support for President with reform-minded agenda Sin tax, Reproductive Health, and significant steps toward Mindanao Peace Process

Improvement in Public Finances and Debt Levels Gains in administrative measures toward tax collection have proved meaningful Overall debt levels have declined; debt has become increasingly longer-dated and denominated in local currency

Healthy Economic Growth and Improved Outlook Strong levels of domestic consumption with new engines of growth coming online Pace of reforms has injected new level of confidence in countrys growth prospects Stable inflation environment Long-tested ability of the Central Bank to maintain macroeconomic and price stability in a downturn or boom scenario Favourable macroeconomic outcomes supported by a strong policy-making framework Strong banking system The Philippine banking system is well capitalized above regulatory requirements, profitable, with robust buffers against asset quality deterioration Philippine banks have liquid, deposit-funded balance sheets and sound loss-absorption capacities outcomes supported by a strong policy-making framework

Credit Ratings - Impact on Markets

Credit ratings are proven to impact the markets

Better ratings mean greater savings to issuers IMF study shows reaching investment grade reduces sovereign spreads by 36% beyond what is implied by macroeconomic fundamentals. This compares to a 5-10% reduction in spreads following upgrades within the investment grade asset class, and no impact for movements within the speculative grade asset class. A separate IMF study also shows that negative outlook announcements are followed by statistically significant CDS spread widening; 100bps for advance economies and 160bps for EMs.

% Yield

Significance of Investment Grade

Benefits and implications of reaching Investment Grade There are both tangible and intangible benefits to crossing the Investment Grade threshold Financial Benefits Policy Benefits Corporate Benefits

Marks a milestone in ROPs financial market development Lowers cost of funding across the board, whether for bonds or bank loans Raises profile of ROP among global investors potentially leading to increased investment flow

Serves as a strong platform to achieve other national objectives increased investments, strong economic growth, and higher per capita income International affirmation of policymaking and the positive developments in the country

Improves access to bond markets for Philippine corporate borrowers and allows them ability to obtain investment grade rating Lowers the cost of funding for corporate borrowers

Significance of Investment Grade

ROP government bond yields have outperformed peers due to strong onshore bid Government Bond Yields (10-year)
Philippines Indonesia Singapore India USA Italy percent 10 8 6 4 2 0 1/1/13 2/1/13 3/1/13 4/1/13 5/1/13 6/1/13 7/1/13 8/1/13 9/1/13 10/1/13

Significance of Investment Grade

ROPs 5-year CDS spreads trade tighter than regional peers

Credit Default Swap (CDS) Markets

Japan Korea Indonesia Malaysia Philippines Thailand bps 320 280 240 200 160 120 80 40 0 1/1/13 2/1/13 3/1/13 4/1/13 5/1/13 6/1/13 7/1/13 8/1/13 9/1/13 10/1/13

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Significance of Investment Grade

PSE posts significant gains during the first half of 2013 Stock Market Index
Korea Indonesia Malaysia Philippines Singapore Thailand Jan2013=100 130.0

120.0

110.0

100.0

90.0

80.0 1/1/13 2/1/13 3/1/13 4/1/13 5/1/13 6/1/13 7/1/13 8/1/13 9/1/13 10/1/13

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Significance of Investment Grade

Exchange rate movements is broadly in line with regional trends Exchange Rate
India Indonesia Malaysia Philippines Singapore Thailand Jan2013=100 110.0 105.0 100.0

95.0
90.0 85.0 80.0 1/1/13 2/1/13 3/1/13 4/1/13 5/1/13 6/1/13 7/1/13 8/1/13 9/1/13 10/1/13

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Beyond Investment Grade

Key factors that will move the sovereign credit ratings up or down
What could change the rating - Up Sustained strong GDP growth that narrows income and development differentials with 'BBB' range peers An uplift in the investment rate that enhances growth prospects without the emergence of macroeconomic imbalances Broadening of the fiscal revenue base, as well as further improvements in the structure of the Philippine sovereign debt stock. What could change the rating Down A reversal of reform measures and deterioration in governance standards. Sustained fiscal slippage, leading to a higher fiscal debt burden. Deterioration in monetary policy management that allows the economy to overheat. Instability in the banking sector, leading to a crystallisation of contingent liabilities on the sovereign balance sheet. What could change the rating - Up Further progress in addressing the countrys key weaknesses Passage and effective implementation of structural revenue reforms More rapid reduction in the general government debt stock; and an acceleration of investment spending that ensures a higher economic growth trajectory. What could change the rating Down Emergence of macroeconomic instability that leads to a substantial deterioration in fiscal and government debt metrics, an increase in debt servicing costs, and/or an erosion of the countrys external payments position

Fitch

Moodys

S&P

What could change the rating - Up Evidence of government revenue reforms that facilitate needed improvements in physical and human capital, and institutional and structural reforms that boost private sector investment, including FDI. What could change the rating Down If the Philippines' external performance weakens significantly, external inflows prove difficult to manage and spur overheating in the economy that contributes to banking pressures If problems at one of the large conglomerates impair investor confidence, or if political developments cause the government to veer from its commitment to improving governance

Beyond Investment Grade

The rating was never the end-goal, but the means toward achieving sustained and inclusive growth.

Reaching investment grade rating is a reflection of the progress the Philippines is making toward its medium-term development goals. Obtaining a reputable third party stamp of approval assists the government in attracting the funds needed for further investment. Communication with the markets is key to ensuring this trend remains.

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BSP Policy Thrusts

Commitment to promote and maintain price and financial stability

On monetary policy: sustain appropriate monetary policy stance Continued vigilance over inflation dynamics to safeguard non-inflationary growth On financial stability: continue to initiate key reforms Implement macroprudential measures to minimize systemic risks Enhance corporate governance framework Support capital market development Sustain advocacies on microfinance, financial inclusion and consumer protection On external sector stability: strengthen resilience to external shocks

Maintain market-determined exchange rate Keep comfortable level of reserves and ensure manageable external debt profile Remain an active participant in regional and international fora to maximize the benefits of international cooperation initiatives

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BSP Contingency Measures

Possible responses to surges in capital flows

Dollar and peso liquidity provision measures Continue US dollar repurchase (repo) facility Promote use of banks hedging facilities Adjust terms of access to BSP rediscounting facility Lengthen maturity of BSP lending instruments Regulatory forbearance in the event of excessive capital outflow

Allow financial institutions to reclassify financial assets from categories measured at fair value to those measures in amortized cost Expand items eligible as asset cover for banks FCDU requirements

Careful surveillance of risks Enhance network analysis to test vulnerabilities in terms of interconnectedness of banks and corporates Cooperate with other central banks or IFIs for information sharing Ensure timely and clear communication with FIs and market participants

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Has the Philippines Gained from its Investment Grade Rating?

39th Philippine Business Conference and Expo 22 October 2013, Manila Hotel

WILHELMINA C. MAALAC Managing Director, International Sub-Sector