Welcome signal
It was another piece of welcome news, further enhancing the upbeat Christmas air: Moody’s Investor Service announced last week another credit-rating upgrade for the Philippines as it recognized the government’s decreasing debt level, the strength of the domestic economy and the Aquino administration’s adherence to fiscal discipline. The stock market surged on the day the news report broke, despite the sluggishness of overseas markets. And the peso rose to its highest in a month.
As indicators of the government’s ability to pay its obligations, sovereign credit ratings are used by investors as barometers of the strength and stability of the local economy.
According to Moody’s, the outlook for the country remains very positive as “the Philippines stands to benefit from a prolonged period of lower oil prices and has favorable prospects for strong economic growth.”
Moody’s is the second credit-rating agency to rank the Philippines at two notches above junk status. Earlier this year, Standard & Poor’s gave the Philippines a similar upgrade. Of the three major rating agencies worldwide, it is only Fitch Ratings that still puts the Philippines at its minimum investment grade.
The most palpable impact of credit-rating upgrades is a decline in interest rates on the loans of government and private sector borrowers. And if the savings in interest payment to be generated by the government will be channeled into worthy programs—e.g., increased spending on education, new roads and improved healthcare—that are transparent and free of corruption, then the benefits of such upgrades on the economy can trickle down to the masses.
The inflation picture is looking bright as well, thanks to the weakening of crude oil prices that, in turn, has led to lower transportation and electricity costs in oil-dependent Philippines. The Bangko Sentral ng Pilipinas has in fact cut its forecast on inflation this year to 4.2 percent from 4.4 percent, and to 3 percent from 3.7 percent for 2015. Consumer prices rose 3.7 percent in November from a year ago, the slowest in 12 months. The prices of gasoline, diesel and liquefied petroleum gas have been falling together with electricity rates. As a result of the slumping crude oil cost, the government has lowered the minimum transport fare.
A damper, however, is the apparent underspending by the Aquino administration. Although seen as a reason for the “strengthening” fiscal position of the government, it is partly blamed for the lower-than-expected 5.3-percent economic growth in the third quarter of 2014, the weakest since 2011.
As noted earlier, the Aquino administration has been too slow in spending what has already been budgeted for the year. From January to October this year, the government’s budget stood at a deficit—just P33.6 billion, or way below the P244 billion programmed for the period. Total government expenditures was lower by P303 billion than the P1.9 trillion programmed for the period.
The other potential dampers we have to watch out for: The main one is the anticipated power shortage, specifically in the summer of 2015. Emergency powers for President Aquino may not be forthcoming, judging by the opposition of Sen. Sergio Osmeña III, the chair of the Senate energy committee, to the idea. So the government will have to rely solely on the so-called Interruptible Load Program (ILP). This is a voluntary scheme wherein participating companies like mall operators will disconnect from the Luzon power grid and use their own generators for their operations especially during the months of March to July when demand for electricity is usually high. These companies, in turn, are supposed to be reimbursed the price difference between the expensive electricity produced by their generators and the power that they otherwise would have bought from the grid through distributors such as Manila Electric Co. Without the ILP, Luzon faces a 700-megawatt power shortage in the summer of 2015; this could trigger daily rotating brownouts.
Too much politics could also put a chill on the country’s hot economic prospects. Such a scenario is not farfetched with the national elections just around the corner, given the possibility that the next leaders Filipinos will elect might not have the fiscal discipline of the Aquino administration.
Moody’s action signals to foreign investors that the Philippines is headed in the right direction. We need to keep our country’s advancing economy going. We cannot afford another setback because of politics.
