Recent upgrades of the Philippines’ financial standing with international creditors and financing institutions by the Big 3 of the world’s credit rating agencies is certainly something to crow about, even if it is not fully appreciated by majority of the nation’s citizens.
In April, credit rating agency Standard & Poor’s raised its outlook of the Philippines’ ability to pay back what it borrows to “positive” from “stable,” with a hint to upgrading its outlook within the next 24 months up a notch higher.
In its rating system, the Philippines is now at the top of its BBB ranking list, and is just one step away from a BBB+ rating, at par with Thailand, a regional competitor who at one time looked miles ahead of us in terms of economic attractiveness.
Last week, Fitch Ratings and Moody’s also issued their own ratings statements, although both were reiterations of earlier outlooks.
Fitch last upgraded its Philippine rating in December 2017, to a BBB from a BBB-. Moody’s, on the other hand, has maintained its outlook for more than three years now; its last upgrade was in December 2014, when it lifted ratings to Baa2 with a stable outlook.
Reading between the lines
All three credit rating agencies have almost similar rating values about the Philippines, but it is the fine print – where each elaborates individual statements – that reading between the lines becomes interesting.
For a little history, the Philippines received its first investment grade badge in 2013 from Fitch, after being classified “junk” for years. S&P soon after followed, and Moody’s was last on the bandwagon. These were hard-earned medals for the economic team of the previous administration headed by former finance secretary Cesar Purisima.
The ratings of the Big 3 were based largely on the continued positive health of the Philippines economy during the previous years, the government’s continued upbeat strides with regards fiscal and debt management, as well as a perceived political stability with improved governance.
The jump from “junk” to investment grade made the Philippines more attractive to foreign investments, while at the same time, lowered interest rates on government and private sector loans. More importantly, this meant that the country was no longer a credit risk.
Accelerating inflation
When S&P issued its credit rating upgrade in April this year, it cited the country’s strong economic growth, healthy external position, and improving policy-making.
Economic growth was seen to climb higher than last year’s 6.7 percent, with robust increases in tax collection being experienced from the implementation of the Tax Reform for Acceleration and Inclusion Law (TRAIN), the first phase of the government’s comprehensive tax reform initiatives made effective at the start of 2018.
This prognosis, unfortunately, was given before the Philippine government released its first quarter performance report where it flatly blamed accelerating inflation to a slightly lower-than-expected GDP growth.
In April, inflation was acknowledged by government planners to have spiked to a five-year high of 4.5 percent, above the Bangko Sentral ng Pilipinas’ target range of two to four percent. In May, inflation registered at 4.6 percent; and in June, it soared to 5.2 percent.
This month, the country’s central bank warned that inflation could still climb higher, possibly by this third quarter of the year, even as it was preparing to address the issue by aggressively raising rates further.
To tame inflation, the BSP’s Monetary Board announced two 25-basis point policy rate hikes, the first in May, and the second in June. A third hike has been strongly hinted at this August, with a stern warning that the governing body would not take the threat of runaway inflation lightly.
Risks
It therefore should come as no surprise that Fitch and Moody’s both wrote of “downsides” arising from the recent developments. While both agreed that rising inflation would abate later in the year or early next year, both also talked about risks.
Fitch warned of “overheating” dangers, notably because of rising inflation, rapid credit growth, and a widening trade deficit. During the year, the Philippine peso was suddenly tagged as one of the weakest currencies in the Asia Pacific region as it breached the P53-mark against the dollar.
With the current administration aggressively pushing its Build Build Build infrastructure program, the trade deficit has further widened, adding more pressure on the peso. This was exacerbated by lower export earnings and higher import spending.
Fitch, like Moody’s, however, were optimistic that the “overheating” dangers were being adequately dealt with by the appropriate government institutions, and agreed that inflation would be contained at an appropriate time.
Downgrade possibility
With regards the political landscape, Moody’s raised the downside risk, specifically of President Duterte’s recent policy statements supporting changes in the government system, as well as political polemics that have alienated potential investors.
Particularly, Moody’s singled out threats to the health of the government’s treasury with structural changes in the governance framework, including a recent Supreme Court ruling redefining the share of the national government in favor of the local government, and the proposed shift to federalism.
And for the first time in decades, a veiled threat of a possible credit rating downgrade was mentioned in Moody’s recent credit rating advisory.
Additionally unnerving is the view by some key members of Duterte’s economic team; specifically, they note that the planned shift to federalism would wreak havoc on the country’s fiscal management and that this would really give the Big 3 some serious thoughts about calling for a downgrade.
After enjoying successive credit upgrades for five years, a downgrade would be a shame.
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