If President Benigno Aquino wonders why the Philippines isn’t shaking its junk-bond status, a visit to the local supermarket might set him straight.

There, he will find that food prices are surging and pushing growing numbers of his people into extreme poverty ― the less-than-$1.25-a-day kind. The Manila-based Asian Development Bank says as many as 64 million more Asians may suffer this fate in 2011, negating almost every other economic metric of progress.

This is worth considering for a Philippine leader who’s gotten lots right since taking office in June: 7 percent growth, political stability, healthy banks and a narrower budget deficit. His finance team is hitting the road to argue that the archipelago is no longer the sick man of Asia and shouldn’t be two or three levels below investment grade.

The Philippines probably deserves a higher rating. Yet the risks of food inflation shed light on why Standard & Poor’s and Moody’s Investors Service rate the nation on par with Egypt.

One in four of Aquino’s 102 million people already live on less than $1.25 a day. In developing Asia, families spent more that 60 percent of their income on food before the latest jump in costs. Soaring food prices in many Asian economies have risen an average of 10 percent so far in 2011. That means a sizeable chunk of the Philippine population is growing poorer by the day regardless of economic growth rates.

When Aquino talks of improving fundamentals, he’s referring to healthy gross domestic product gains, increasing public revenue and his policies of going after tax evaders, smugglers and corrupt officials.

Observers, credit analysts included, tend to worry about the cracks in the foundations of a system trying to shake off the corruption of past leaders. Vested interests are very effective at maintaining their edge in the Philippines.

Aquino has said the right things about cleaning up and generally chosen good policy makers. Reappointing Amando Tetangco, the respected central bank governor, was a smart move. Aquino hasn’t dazzled markets, though. He needs a couple of bold, headline-grabbing corruption convictions.

An obvious place to start is going after the billions of dollars watchdog groups say former dictator Ferdinand Marcos looted during his 21 years in power. Far from being held to account, Marcos’s family is staging a political comeback, winning seats in Congress. There’s also growing speculation about corruption charges being made against his predecessor Gloria Arroyo and her supporters.

The Philippines ranks 134th out of 178 countries in Transparency International’s 2010 corruption perceptions index, tied with Bangladesh and Zimbabwe. That’s a sobering reminder of the heavy lifting Aquino needs to do to make his economy more efficient and equitable.

The good news is that Aquino is off to a decent start. Arroyo did little to make the Philippines more competitive in a region being reshaped by China. Instead, she relied on strong GDP to paper over weaknesses and failed to invest more in education, health care and family planning.

Overpopulation plagues the Philippines, and it’s an issue politicians can’t touch thanks to the powerful Catholic Church. Arroyo had legitimacy issues, having taken over when Joseph Estrada, a former movie actor, was ousted amid corruption allegations in 2001. Leadership challenges from Estrada and his supporters had Arroyo turning to the church for support. That meant no discussion of birth control was possible.

Aquino now is risking the Vatican’s wrath with a “responsible parenthood” bill, and good for him. Development economist William Easterly has a point when he says the Holy Grail of prosperity is seven inches of latex: a condom.

It’s entirely possible Aquino will cave in, yet his economy would be better off if he stood firm on the issue. The same goes for stopping bureaucrats from shaking down entrepreneurs who want to create fresh jobs and wealth.

So maybe it’s time to give credit where it’s due: the Philippines has made enough progress to warrant debt upgrades. It’s now rated one grade above Greece. On its face, the Philippines seems to deserve being in a better financial neighborhood than that.

Yet poverty and corruption have credit-raters wondering if the nation is ready for prime time. For me, a recent trip to the island of Cagraray, an hour’s flight south of Manila in Albay province, helped put things in perspective.

Bumpy runways, potholed roads and unreliable power there were evidence of how shady deals between government and business squander money needed to upgrade the nation’s dismal infrastructure. The one-hour drive to the resort where I was speaking included a ride on a rickety ferry that had even the locals eyeing the life preservers. Way too many kids who should be in school were standing along the roads selling chewing gum, water or cigarettes.

Food inflation is likely to lead to even more kids on the streets to supplement family income. What good is rapid growth if it’s not getting to the neediest segments of the population? The Philippines has yet to address this question in a meaningful way. Until it does, its credit rating will suffer.

By William Pesek

William Pesek is a Bloomberg News columnist. The opinions expressed are his own. ― Ed.

(Bloomberg)