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Investment grade

The administration is still basking in the glow of the country’s first-ever investment grade rating from Fitch. The glow, however, can quickly dissipate if the benefits expected by the public do not materialize soon.

A credit rating upgrade, which makes the country less of a credit risk, lowers the cost of doing business, which is good news for investors.

On the government side, this is expected to free up funds that can then be used for poverty alleviation and improvement in basic services. The daang matuwid administration can trumpet the message that with good governance, the public can be assured that any savings will be put to good use.

When it comes to investments, however, people expect that the credit rating upgrade will attract not just hot money, which takes flight at the slightest hint of trouble, but more importantly, long-term, job-generating foreign direct investments (FDI).

Last January, net FDI inflow plummeted by 45 percent from the same month in 2012, from $1.05 billion to $576 million. Gross FDI inflow actually rose by 20 percent, at $1.29 billion, but the outflow of $711 million was approximately 32 times higher than the $22 million in January 2012, according to Bangko Sentral ng Pilipinas data. The drop in FDI was attributed largely to external factors particularly lingering problems in advanced economies.

The government is hoping the Philippines’ investment grade will keep the country on track to achieve this year’s FDI target of $2.2 billion.

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While being rated investment grade sends the right signal, attracting FDI will still need all those factors that investors want to see in place, such as better infrastructure, judicial and regulatory reforms, and ease in setting up businesses.

With the credit rating upgrade, the administration should be feeling greater pressure to show that significant levels of FDI are coming in. The rating upgrade raises public expectations of more investments.

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Just getting stalled projects moving can send an encouraging signal. Among the agencies closely watched by foreign investors is the Department of Transportation and Communications, mainly because certain big-ticket projects involving several countries are under the DOTC.

Mar Roxas suspended the projects for review when he was DOTC chief. I’ve been told that for the affected investors, it seemed like Roxas had locked away the project and thrown away the key. In the meantime, the financial meter and deadlines stipulated in the contracts kept running.

An example is the multinational CNS/ATM, or Computer Navigation System / Air Traffic Management project for all Philippine airports. This automated air traffic system can help get the country out of its Category 2 aviation safety status, which prevents Philippine carriers from flying to Europe and several US cities. European tourists also cannot get insurance for travel to the Philippines because of Category 2.

Jose “Ping” de Jesus approved the CNS/ATM deal in 2010 when he headed the DOTC. The project is funded by the Japan International Cooperation Agency (JICA) and the lead contractor is Japanese. French aerospace giant Thales is providing the navigation system while Kiwi air service traffic provider Airways New Zealand is the consulting engineer.

The DOTC review of the deal is supposed to be over and the project can be “reinitiated” by September. But first the parties must agree on the terms to restart the project. The investors want to include some form of compensation for the costs they incurred while the project was in limbo. The government is balking so the project still can’t get off the ground.

Investors will probably understand if either De Jesus and other DOTC officials or the contractors were formally charged or investigated for possible anomalies. This did not happen so the suspension of the project seems arbitrary, done just to show there’s a new DOTC boss.

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Roxas is Mr. Nice Guy, amiable and competent, and he has not been linked to dishonest deals. But investors saw him as risk-averse when he headed the DOTC. His stint in the department was one of the biggest factors behind the impression that little was moving in the Aquino administration to encourage FDI.

Apart from the interminable wait for the project reviews to be over, investors bewailed that Roxas suspended deals that were approved by an Aquino appointee.

The Philippines has already gained notoriety for its inability to guarantee the sanctity of contracts from one president to the next. Seeing this happening from one department head to the next under the same president raises the level of uncertainty in doing business.

Joseph Emilio Aguinaldo Abaya, the new DOTC chief, will have to dispel this uncertainty. So far the reviews have been underwhelming, but he’s been in office for only half a year and perhaps needs more time. Several investors have told me that while Jun Abaya has made the right noises, supporting policies are still missing.

More decisive action is needed if the government wants to sustain that investment grade and further improve. We’re still at the minimum investment grade category, up by a notch from BBB- to BB+.

In the Fitch system, BBB ratings, the “lowest” investment grade category, “indicate that there is currently expectations of low credit risk. The capacity for payment of financial commitments is considered adequate but adverse changes in circumstances and economic conditions are more likely to impair this capacity.”

Higher up the ratings ladder are categories A, AA and AAA. Triple A means the capacity to fulfill financial commitments “is highly unlikely to be adversely affected by foreseeable events.”

From 2011 to 2012, countries rated Triple A by Fitch were Australia, Austria, Canada, Denmark, Finland, France, Germany, Singapore, the Netherlands, Norway, Sweden, Switzerland, the US and the UK. China was rated A+ while Malaysia and Thailand were rated A-.

With the right policies and actions, we can also get there.


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