On a roll
On the economic front, the Aquino administration is on a roll. The strong growths in gross domestic product in the past two years are proof of this, and the international community is taking notice through the investment-grade ratings from Standard and Poor’s, Moody’s Investor Service, and Fitch Ratings. Asean finance officials are also holding an investors’ seminar
today at the Manila Peninsula. Tomorrow until Friday, the Philippines is hosting the prestigious World Economic Forum on East Asia. Also tomorrow, a high-powered meeting of the Asean Business Club, an association of the chief executives of the region’s major business enterprises, will be held at the Fairmont Hotel.
The Bangko Sentral ng Pilipinas captured the optimism pervading the government and the private sector when it predicted that another round of credit-rating upgrades for the Philippines was forthcoming after S&P adjusted early this month the Philippines’ sovereign rating to a notch above investment grade. As BSP Governor Amado Tetangco Jr. put it, other rating agencies would recognize, just as S&P had, the continued sound macroeconomic fundamentals of the country, and “this recognition will happen sooner rather than later.”
A new round of upgrades will definitely make the country even more attractive to foreign investors in the coming months. Since the Aquino administration took over in 2010, fiscal and monetary policies have stabilized inflation, brought interest rates to historic lows, and attracted new investments. Good governance reforms, on the other hand, have lifted the country’s rankings in global competitiveness surveys. Tetangco is betting on Moody’s to give the Philippines its next credit-rating upgrade as it has had the country’s sovereign grade on “positive” watch since October 2013—an indication that an adjustment is due within a year.
A credit rating is an evaluation of a debtor’s ability to pay back debt. A sovereign credit rating is an evaluation of a national government as a borrower, and indicates the risks in the investment environment of a country. This is considered by foreign investors in deciding on where to put their money. There are many benefits that the Philippines will derive from the investment-grade ratings—some tangible and some not. For instance, many institutional investment funds are banned by their own internal rules from putting money in countries with “junk” credit ratings. With the Philippines finally ending last year its long history of junk-debt status, it has entered the radar screens of these investment funds. In 2013 the Philippines got investment-grade status from Fitch, then S&P, and finally Moody’s. In that year, according to the BSP, foreign direct investments, the kind of money used to build new factories that generate jobs, jumped 20 percent.
An investment-grade rating is also a vote of confidence in the sustainability of economic growth. In upgrading the Philippines’ credit rating, S&P said: “We expect ongoing reforms on a broad range of structural, administrative, institutional and governance issues to endure beyond the term of the current administration.”
Another positive effect will be interest savings on the government’s burgeoning debt. Given the perception of its improved ability to repay its obligations, more creditors will be willing to extend loans to the government, which can then demand the lowest rate possible. Lower interest rates for government loans reduce the strain of debt servicing on taxpayers. The savings on interest payments can then be channeled by the government to new infrastructure undertakings and other social projects that focus on education, healthcare and poverty alleviation.
The private sector also stands to benefit in terms of lower borrowing cost. Yields on government IOUs are used by banks in pricing their own loans to businesses and households. Lower interest rates on state-issued debt, therefore, will mean lower rates for bank loans. This will make it easier for companies to expand, which can in turn ease the joblessness in the country. Households will also benefit from lower rates for personal loans for car and home purchases.
Critics may say what they want about the Philippines’ getting investment-grade ratings. At the end of the day, the net effect of this credit status is that in the eyes of the international community, the Philippines is worth dealing with. It is, in our view, more than just an image effect.
