Pragmatic rating

The Aquino administration has received much praise from foreign and local institutions for the “spectacular” performance of the Philippine economy in 2012. The International Monetary Fund, World Bank, Asian Development Bank and private think-tanks have all been bullish on the Philippines. Thus, many were surprised by the release last week by Malaysian credit-watcher RAM Rating Services of its inaugural sovereign ratings for five leading Southeast Asian countries. In brief, it showed the Philippines as the laggard among the region’s major economies.

In an 80-page report titled “Leading Asean Sovereigns,” RAM gave the Philippines a rating of “BBB” on its long-term borrowings, meaning that it had only “moderate capacity to meet its obligations.” The Philippines was also given a short-term rating of P2, also the lowest in this category, meaning that it had “adequate capacity to meet its short-term financial obligations.” Malaysia and Singapore got the highest ratings of “AAA” and P1, respectively, meaning “superior capacity” to pay long-term debt and “strong capacity” to settle short-term obligations. Indonesia and Thailand got “AA” and P1, the former indicating “strong capacity” to meet long-term obligations.

RAM was incorporated in 1990 and listed among its shareholders Fitch Ratings, McGraw-Hill Asian Holdings (Singapore), and the Malaysian subsidiaries of Bank of America, Bank of Tokyo-Mitsubishi UFJ, Deutsche Bank, Citibank, HSBC, JP Morgan Chase and Standard Chartered.

In explaining the ratings for the Philippines, RAM noted the country’s strengths in terms of sustained current-account surpluses, rising foreign currency reserves and improving economic conditions. But it said these pluses were being watered down by a “heavy government debt burden, mostly in foreign currencies; a small revenue base and hefty interest expenses [that] strain the fiscal profile, and a weak institutional framework.”

“Our assessment of the Philippines’ fiscal profile reveals persistent deficits due to the government’s weak revenue-generating capacity; tax revenues are its main source of income. As a percentage of GDP, government revenue averaged 15.3 percent from 1990 to 2011 and is the lowest among its peers in the region,” it said.

RAM observed that Philippine budget deficits had largely been narrowing because of better tax administration and collections. “There is also noticeable improvement in its debt ratio, from more than 70 percent of gross domestic product a decade ago to 50.8 percent as of end-2011,” it said. But it added that “the government’s debt load is still hefty and its sizeable foreign-currency-denominated borrowings amplify foreign exchange risk.”

“While the Philippines’ recent economic performance is noteworthy, we are also mindful that much more needs to be done to reposition its misaligned identity—from a remittance-dependent economy to one powered by investments and stronger industries,” RAM said. And while it noted that the Aquino administration was laying the foundation by focusing on upgrading infrastructure and enhancing human-capital development, “the Philippines’ ability to attract FDI still pales in comparison to its regional peers at this juncture.”

Achieving inclusive growth is also being made difficult by the Philippines’ burgeoning population, the world’s 12th highest at more than 95 million. RAM noted the mass poverty that continued to affect about a quarter of the population, as well as the national unemployment rate that stood at 6.9 percent in the second quarter of 2012, and underemployment remaining widespread at 19.3 percent. The “educated unemployed” as a percentage of the total unemployed labor force exceeded 40 percent, highlighting the problem of labor mismatch that has forced Filipinos to work overseas.

RAM’s assessment is the most pragmatic compared with those of Moody’s, Standard & Poor’s and Fitch Ratings. Many in the Aquino administration and in the private sector will cast doubt on RAM’s assessment and point out that the three biggest credit watchdogs are in fact bullish on the Philippines. But it may be well to recall that about four years ago, Moody’s and S&P were criticized for their role in the global credit crisis that saw the fall of the venerable investment house Lehman Brothers in September 2008, leading the world to a sharp economic decline that persists today. Then, the likes of Bank of America, Citi and Merrill Lynch had sterling credit ratings, yet all reeled from the effects of the subprime crisis. Those glowing ratings appear to have been flawed.