UPDATE 1-Moody's ups Philippines rating to Ba3 from B1

HONG KONG, July 23 - Moody's Investors Service raised its sovereign rating for the Philippines on Thursday to Ba3 from B1, praising the country's resilient financial system and external payments position amid difficult global conditions.

The agency said the rating had been changed after the country's foreign exchange reserves hit a historical high and after no special measures had been required to protect the banking system from external shocks.

The rating, which is now three notches below investment grade, has a stable outlook.

Fitch has a BB rating on the Philippines, a notch higher than Moody's new rating and S&P's BB-minus rating.

Moody's analyst Tom Byrne said pressures on the government's budget had risen since the start of the year but despite a larger gap, additional finances could be raised.

"The re-opening of global credit markets this year has also been opportunistically exploited by the Philippines in its effort to minimize both a crowding-out of the domestic markets and a rise in government bond yields," Byrne said.

Manila took advantage of robust investor appetite for riskier assets and support from local banks to sell $750 million in global bonds this month. The bonds were sold at a yield of 6.625 percnt, down from an 8.5 percent yield on a $1.5 billion deal in January.

The Philippines, one of Asia's largest sovereign debt issuers, may return to the global bond market again later this year to raise some of its debt requirements for 2010, Finance Secretary Margarito Teves said on Thursday. [ID:MNA000317]

Moody's said the collapse in economic activity, both domestic and external, was the main cause for the higher budget deficit but added revenue inflows should improve and help cap the gap as economic growth is gradually restored.

However, it also said the Philippines' debt overhang is higher than those of others rated Ba3 and that a return to a path of fiscal consolidation was critical.

It said the improvement of the long-term fiscal outlook was dependent on boosting revenues, both through tighter administration and the introduction of new tax measures, several of which were pending before Congress.

"Overall it's still a peso and bond market positive.... But that does not mean that revenue issues are out of the way," said Vishnu Varathan, an economist at Forecast Pte in Singapore.

MARKETS RALLY

The Philippine peso <PHP=> jumped after the upgrade and some traders said the central bank was buying dollars to prevent the peso strengthening past the key 48 to a dollar level. [ID:nSP520206]

Local bonds were also boosted by the news and yields fell on hopes the government would return to international markets for any further borrowings, since a higher rating would allow it to get better terms. [ID:nHKG276797]

Philippine central bank governor Amando Tetangco said the upgrade was a result of a number of economic and financial reforms by the government and the central bank.

"The upgrade by Moody's of our sovereign rating to Ba3 and the recent affirmation of S&P and Fitch are a recognition of the resiliency of the Philippine economy in withstanding the effects of the global crisis," he said in a text message.

Moody's also said key concerns in the current environment were exports and remittances.

The rating could come under downward pressure from an inability to improve government finances as the global economy recovers or from a structural weakening in the balance of payments, it said.