THE ADMINISTRATION of President Aquino deserves praise for the credit-rating upgrade by Moody’s Investor Service, which brought the Philippines’ ratings from all three major international credit watchdogs to just a notch below investment grade. (Fitch Ratings and Standard & Poor’s raised their own ratings for the Philippines earlier this year, citing encouraging economic developments.)
The upgrade in the credit rating by Moody’s was proof that “good governance is good economics,” according to Finance Secretary Cesar Purisima, who noted that the decision was the ninth positive action for the Philippines from various credit-rating agencies since Mr. Aquino took office in 2010.
Moody’s said the Philippines’ improved credit rating was based on its healthy pace of growth, improving fiscal performance, stable banking sector, and projected ability to keep its economy growing over the medium term. The economy grew 6.1 percent in the first half of 2012, surpassing the government’s goal of 5-6 percent for the year. The peso is hovering at a little above 41 to a dollar, better than the P42-45:$1 exchange rate assumed by the central bank for 2012. Foreign exchange reserves hit a record high of $81.9 billion in end-September, beating the full-year forecast of $78 billion. Inflation also eased to 3.2 percent in September, the lower end of the Bangko Sentral’s target of 3-5 percent. On the fiscal side, the budget deficit stood at just P106.06 billion as of September, a third of the P279.1-billion ceiling for the year.
A higher credit rating can mean a lot even to ordinary Filipinos because it will lower the interest rate on obligations of the government, which remains burdened with a P5-trillion debt. A reduction of one percentage point in the interest rate on these loans can translate to about P50 billion in savings a year for the government. The savings can mean higher funds for infrastructure, health and education. Building more roads, schools and airports will mean more jobs. Better infrastructure, in turn, will lead to more private investments, and more investments will mean even more jobs. The cycle goes on.
Moving forward, a lot still needs to be done to get the much desired investment-grade rating. Investments do not automatically come in with a credit-rating upgrade. The government must continuously lay the groundwork for the easy entry of investments.
And there lies a problem. Despite the many positive developments under the Aquino administration, doing business here remains difficult. The Philippines slipped two notches in the global rankings of ease in doing business—to 138th from 136th—due to the absence of significant reforms to speed up dealings of enterprises with various government agencies. The “Doing Business 2013” report, published last month by the World Bank, showed that the Philippines registered slightly poorer rankings in almost all categories related to ease in doing business for the period June 2011-June 2012.
“While the Philippines continues to improve its macro-economic environment and sets pace-setting growth in gross domestic product, it lags in the implementation of regulatory reforms that would make it easier for local entrepreneurs to conduct their businesses,” the report said. The problem seems to be at the level of local government units, where corruption remains rampant to this day.
Except for Laos, which ranked 163rd, all other Southeast Asian countries beat the Philippines in the rankings on ease in doing business.
There are other critical issues that require action. Credit-rating officials have long cited reform in the “sin” tax system as a key component in boosting the government’s fiscal position, but the proposed reform remains embroiled in controversial debates in Congress. Another crucial issue is the easing of the restriction on foreign ownership, which is enshrined in the Constitution and therefore needs action again from Congress. Intended to protect national interests against predatory foreign investors, the ownership restriction has become a protector of uncompetitive local businessmen and a deterrent to investment flows.
It has been 10 years since the Philippines has had this kind of credit rating of one notch below investment grade. The previous administration squandered the chance to translate a good credit standing to a prosperous economy and a better nation. Today, the Aquino administration enjoys the benefit of hindsight for it to avoid the pitfalls of its predecessor. It better not waste this golden opportunity.