The Philippines has inched closer to its cherished investment grade status with Standard and Poor's on Wednesday upgrading its credit rating on the island nation by one notch, citing improved public finances.

Two of the three major credit rating agencies now have the Philippines just one notch below the investment grade. S&P raised the long-term foreign currency rating on the sovereign to 'BB+' from 'BB', equalizing it with the agencies 'BB+' local currency sovereign rating.

Fitch Ratings also have a BB+ rating for the country. Both the agencies have a 'stable' outlook on the rating. At the same time, Moody's Investors Service rates the Philippines at Ba2, two notches below investment grade. Moody's upgraded the rating outlook to 'positive' in May.

S&P said in a statement on Wednesday that the Philippines' fiscal flexibility is gradually increasing, reflecting an improving government debt profile and moderating interest burden. "We expect the country will move into a slight net-external-creditor position this year."

"The rating action also reflects the country's strengthening external position, with remittances and an expanding service export sector continuing to drive current account surpluses." S&P credit analyst Agost Benard said.

At the same time, the analyst warned against a high, albeit declining, interest burden, which currently stands at 13 percent of general government revenues. The level "is high," he said, "largely because revenues remain low relative to the size of the economy."

Benard also noted that low revenue generation owing to a narrow tax base and high incidence of non-compliance is a key reason for the shortage of basic infrastructure and public services in the Philippines.

Nonetheless, S&P sees the economy's medium-term growth prospects as more favorable, if increased political stability stimulates private sector growth, and the administration's fiscal consolidation program enables higher levels of public investment.

Responding to the S&P move, Philippine Secretary of Finance Cesar Purisima said "this is the 8th positive credit ratings action under the Aquino Administration and this only gives us more confidence to continue with the work that we have started towards macroeconomic stability, fiscal sustainability, and inclusive economic growth."

"Two out of the three major credit rating agencies now have us one notch below investment grade. We can now clearly make our case for an investment grade status," the official added.

The economy expanded 6.4 percent year-on-year in the first quarter of 2012, the strongest pace since the third quarter of 2010.

RTTNews