Foreign funds seen swamping PH after credit upgrade

By Prinz P. Magtulis, The Philippine Star

Posted at Mar 31 2013 12:02 PM | Updated as of Apr 01 2013 03:29 PM

MANILA, Philippines - Foreign funds could swamp the Philippines as a result of an investment grade rating granted by Fitch Ratings last Wednesday, on what analysts said could be early signs of improved investor sentiment.

New York-based Fitch raised the country’s credit rating to BBB- from BB+, with a stable outlook citing strong growth, stable inflation, healthy external payments position and improved fiscal discipline.

“Fitch’s surprise upgrade to investment grade (IG) credit rating supports the strong local financial market rallies that have implicitly priced in an IG sometime this year,” Citi economist Jun Trinidad said in a research note.

In particular, offshore funds would flock the local bourse and foreign exchange market, he said, putting more pressure for record-high performances this year.

The Philippine Stock Exchange index (PSEi) surged 182.35 points or 2.34 percent to close at a new record of 6,847.47 last Wednesday after Fitch’s announcement. The increase, PSEi said, was the highest one-day gain since Aug. 27, 2012.

The peso, on the other hand, bounced back to the 40 to a dollar level, closing at 40.83 after slumping to its weakest performance for the year the day before at 41.07. The local currency was Asia’s second best performer last year.

“We believe (the upgrade) will boost the positive medium-term sentiment of the peso, which we are already in line with, given the solid growth backdrop, reforms, good governance, etc.,” said Euben Paracuelles and Craig Chan of Nomura.

“As for flow implications from the upgrade, the short-term positive news could contribute to a peso gain on more short-term inflows,” they added.

Trinidad agreed, saying more foreign portfolio inflows— which usually enter stock and bond markets and could also easily leave anytime— could enter the economy. This, in turn, could make the central bank’s job tougher.

Portfolio investments, which hit a net inflow of $1.4 billion as of February, are being watched closely by the Bangko Sentral ng Pilipinas (BSP) to ensure they do not create much volatility that could be detrimental to businesses.

“This may be the reason why BSP has been moving urgently to put in place a monetary policy framework and correcting existing policy settings that can manage excess liquidity risk that may come with the upgrade,” Trinidad explained.

Trinidad, Paracuelles and Chan however all agreed there is a need for another agency— whether Standard & Poor’s (S&P) Ratings Services or Moody’s Investors Service— to upgrade the country to solidify its position as an investment destination.

S&P and Moody’s both rate the country one notch below investment grade, although the former has a “positive” outlook, suggesting an upgrade any time soon.

“This suggests a more powerful medium-term flow once the Philippines receives its second investment grade rating (which we view as just a matter of time for S&P),” Paracuelles and Chan said.