* Becomes 1st to lift Manila two notches atop investment grade
* Sovereigns now rated BBB, up from BBB-
* S&P says credit rating outlook stable
MANILA, May 8 (Reuters) - Standard & Poor's raised the Philippines' credit rating to two notches above investment grade on Thursday, the first debt watcher to do so, saying reforms are likely to continue beyond the administration of President Benigno Aquino.
S&P upgraded the Philippines' foreign long-term debt by one notch to BBB from BBB minus, and foreign short-term debt to A-2 from A-3, with a stable outlook, saying the rating reflects the country's strong external liquidity and investment position, and effective monetary policy framework.
In 2013, the Philippines' long history of junk-debt status ended. The country got investment-grade status first from Fitch Ratings, second by S&P and then by Moody's Investors Service.
S&P's move to a second notch above investment grade came as a surprise, as the agency didn't first raise its outlook before changing the rating.
The upgrade, according to S&P, was "based on our assessment that even though a change of administration after the presidential elections in 2016 represents some uncertainty for reforms, the risks have shifted toward maintaining the impetus and direction of the process, away from a potential reversal or abandonment of advances achieved to date."
It noted improvements in structural, administrative, institutional and governance reforms in the Philippines.
Aquino, widely credited by markets for a reform drive that saw the Philippines shrink its budget deficit and raise its infrastructure spending, serves only until June 2016 and cannot stand for re-election, as the constitution limits a president to a single six-year term.
S&P said the Philippines' current account is likely to remain in surplus, and inflation expectations remain well anchored owing to an improved monetary policy environment.
OFFICIALS WELCOME UPGRADE
Philippine officials welcomed the credit rating upgrade, noting it was the 18th positive credit rating action since Aquino took office in 2010, and the fourth upgrade from S&P.
"We will continue to institutionalize good governance so our country's economic growth is both sustainable and inclusive," Finance Secretary Cesar Purisima said in a statement.
Bangko Sentral ng Pilipinas (BSP) Governor Amando Tetangco said in the same statement the rating upgrade was a recognition that the country's structural reforms continue to gain traction.
"The BSP will continue to support sustained and inclusive economic growth amid a low-inflation environment," he said.
"We stand ready to adjust our monetary policy stance and adopt macroprudential measures, as appropriate, to guard against risks that would unsettle inflation expectations and threaten the soundness of our financial system," Tetangco said, adding BSP would continue to pursue policies that keep the country's external payments position strong.
But S&P said the country's low income level remained a key rating constraint in the medium term, with the Philippines' per capita GDP at a projected $2,900 in 2014, still well below similarly rated sovereigns.
It also noted numerous impediments to growth such as a shortage of basic infrastructure and public services, and vulnerabilities such as a narrow tax base and high levels of tax non-compliance.
"The stable outlook indicates that we expect a less than one-in-three probability that we will change the ratings this year or next," S&P said, adding it expects slow progress in raising per capita wealth and clearing structural impediments to growth.
Analysts said the country's fiscal policy management was a major contributor to the credit rating upgrades.
"Now the next challenge for the government is how to use this momentum to continue improving its macroeconomic fundamentals," said Gundy Cahyadi, economist at DBS Bank in Singapore. "Higher credit rating should translate to lower borrowing costs and that is a good opportunity to build on, especially with the on-going infrastructure overhaul."
(Additional reporting by Siegfrid Alegado; Editing by Richard Borsuk)