No Free Lunch

An early Easter gift

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So proclaimed headlines on last week’s investment-grade credit rating granted to the Philippines by Fitch Ratings, one of the “big three” international credit rating agencies. Many believe it’s just a matter of time before the other two, Standard & Poor’s and Moody’s Investor Service, follow suit. Fitch’s move is historic, as this is the first time the country has achieved investment-grade status in decades.

What does this all mean? More importantly, what’s in it for the ordinary Filipino?

Put simply, an entity’s credit rating is a judgment on its ability to pay its debts. An investment-grade rating says, in effect, that it’s safe and worthwhile to make a financial investment in the Philippines, by lending a loan, buying a government or corporate bond, or buying a share of stock in a Philippine company. Fitch Ratings’ website explains: “Credit ratings provide an opinion on the relative ability of an entity to meet financial commitments such as interest, preferred dividends, repayment of principal, insurance claims or counterparty obligations. Investors use credit ratings as indications of the likelihood of receiving money owed to them in accordance with the terms on which they invested.”

But all the rejoicing and self-congratulations must be tempered by the caveats contained in the Fitch announcement, as well as by the wider implications of the rating upgrade, which will not necessarily be welcome to all, as I will explain further below.

The downside in the Fitch message is that we have yet a long way to go to be firmly ensconced among investment-grade peers. It notes, for example, that governance standards, while significantly improved, remain weaker than the norm within the “BBB” investment-grade rating. Also, the Philippines’ $2,600 average income in 2012 is still way below the median of $10,300 for investment-grade countries. Government revenues, at 18.3 percent of GDP in 2012, still pale in comparison to the median of 32.3 percent among “BBB” countries, limiting our ability to boost much-needed public investments. Fitch also points out that a rating reversal could be triggered by backsliding on governance, moving backward on key reform measures, slippage in government finances, deterioration in monetary management that leads the economy to “overheat,” and instability in the banking sector.

This is in fact no time to get complacent and “rest on our laurels”—and President Aquino and his economic managers know it. To realize how far we remain from our goals, we only need to compare ourselves with our neighbors on two things: export earnings and foreign direct investments (FDI)—and the comparison is sobering. Annual export earnings in 2004-2011 in our closest Asean neighbors (Indonesia, Malaysia, Singapore, Thailand and Vietnam) averaged $168 billion, ranging from Vietnam’s $55 billion to Singapore’s $333 billion; we only managed $44 billion. They attracted FDI averaging $6.6 billion yearly in the same period, ranging from Vietnam’s $5.3 billion to Singapore’s $15.7 billion; we got a paltry $1.1 billion. There is so much catching up to do just within our neighborhood, and it seems that running double or triple time just won’t be good enough.

So what’s in the credit rating upgrade for the ordinary Filipino? It’s actually a mix of good news and bad news. The positive side is that more investments—both of the job creating (FDI) and the “hot money” kind—should be drawn into the country by this new vote of confidence; let’s hope there will be much more of the former. Government and firms could borrow funds more easily and more cheaply. Lower interest rates would mean lower costs for government debt, freeing up more funds for health, education, infrastructure and other public investments to uplift people’s lives.

But the negative side is that a major segment of our population faces the very real prospect of lower incomes. Families relying on remittances from abroad, or from earnings in import-substituting or export-oriented industries (including tourism) will be hurt by a rising peso induced by the surge in foreign inflows. Pensioners, retirees and other savers relying on interest earnings from fixed-income placements will also see their incomes drop further. A retiree recently wrote me complaining that his interest income had dropped 40 percent in the past year alone because of falling interest rates, and laments that he now faces a serious problem with making ends meet.

I see at least two problems with the above. First, the downside impacts will kick in much sooner than the upside effects; in fact, they are more certain than the latter. We all know it will take time before new FDI drawn in by the rating upgrade could translate into a significant rise in jobs. Note that this assumes, somewhat wishfully, that the upgrade is enough to attract a big FDI surge, even as other investor concerns such as inferior infrastructure, high power costs, ownership restrictions and others still await definitive resolution. Second, the prompt and predominant beneficiaries of the upside effects are those with large investments in the stock markets, and industrialists whose cost of money, hence of doing business, will fall—in short, the better-endowed among us. How much, how soon, or whether at all the latter benefit will trickle down to their workers or customers is yet another uncertainty. Clearly, translating the credit rating upgrade to more inclusive growth will still be quite a challenge indeed.

We need not be surprised, then, if the ordinary Filipino on the street isn’t jumping for joy over the Fitch upgrade just yet.

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E-mail: cielito.habito@gmail.com

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