Resilience, reform lift Phl to investment grade

By Cheryl M. Arcibal ( | Updated March 27, 2013 – 2:17pm

MANILA, Philippines – Fitch Ratings on Wednesday upgraded the Philippines’ sovereign ratings to investment grade, citing “resilient economic growth” and fiscal reforms.

“The Philippine economy has been resilient, expanding a 6.6 percent in 2012 amid a weak global economic backdrop. Strong domestic demand drove this outturn. Fitch expects GDP (gross domestic product) growth of 5.5 percent in 2013. The Philippines has experienced stronger and less volatile growth than its ‘BBB’ peers over the past five years,” Fitch said in its statement.

(Read related article: Fitch’s statement on Phl’s first investment grade rating)

The upgrade was the first investment grade that the Philippines has ever received from a credit rating agency.

President Aquino said the upgrade could lead to a “virtuous cycle of growth, empowerment and inclusiveness that will redound to the benefit of Filipinos across all sectors of society.”

The market cheered the credit rating upgrade, while Manila-based Asian Development Bank called the upgrade as “unprecedented in the Philippines.”
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Not everyone is joining the party though.

While both the government and the market cheered the upgrade, an analyst warned that the upgrade could lead to a net welfare loss for the Philippines.

The three “Rs” of upgrade

In its statement, Fitch cited remittances, the resilient economy and reforms as among the reasons for the credit rating upgrade.

“The Philippines’ sovereign external balance sheet is considered strong relative to ‘A’ range peers, let alone ‘BB’ and ‘BBB’ category medians. A persistent current account surplus (CAS), underpinned by remittance inflows, has led to the emergence of a net external creditor position worth 12 percent of GDP by end-2012, up from 6 percent at end-2010, ” Fitch said.

In 2012, Fitch added that remittance inflows contributed 8 percent to the country’s economy, proving resilient despite the global financial crisis.

Besides the faster-than-expected growth of the economy in 2012, Fitch also lauded reforms undertaken by the government to shore up the latter’s finances.

Fitch also credited the administration of former President Gloria Macapagal-Arroyo for beginning the reforms needed to improve government finances.

“Improvements in fiscal management begun under President Arroyo have made general government debt dynamics more resilient to shocks. Strong economic growth and moderate budget deficits have brought the general government (GG) debt/GDP ratio in line with ‘BBB’ median,” Fitch said.

The Bangko Sentral ng Pilipinas was also credited for its “track record” in managing inflation as well as its proactive use of macro-prudential measures to limit the potential emergence of macroeconomic and financial imbalances”.

Buoyant mood

The upgrade prompted stock market investors to snap up local shares, sending the benchmark Philippine Stock Exchange index to close at a new record-high at 6,847.47 or a gain of 182. 35 points or 2.74 percent.

“Any investment grade is always a positive as it means improvement in your competence. This is why the market is reacting positively. We will see market consolidation for a while until we reach 7,000 and then the next target is 7,200,” Harry Liu, president of Summit Securities told

President Aquino also said the credit rating upgrade is seen to encourage more companies to consider the Philippines an investment destination.

“Investment grade for sovereign debt should also lead to lower borrowing costs for Philippine companies in the international markets, consequently allowing for higher valuations for their schedules. This in turn enables industries to expand and generate more jobs for our countrymen…,” Aquino added.

The ADB said the rating “can trigger the kind of investment that will help carry the country into its next phase of development.

“Prudent measures to attract investment, improve the business climate and diversify the economy have paved the way for growth. Now it’s up to the authorities to make that growth more inclusive by creating more and better jobs,” said Norio Usui, country economist at the ADB.

Net welfare loss

Economist Benjamin Diokno of the University of the Philippines, however, said the credit rating upgrade has been factored in by lenders, therefore any impact on any plans of the government to borrow money from foreign creditors would be limited.

“At present, the upgrade has been reflected in the bond market. Beside, I don’t think we really need to borrow from abroad because they can borrow from the domestic market to avoid foreign exchange risk,” Diokno said.

He warned that the upgrade could attract more investors and speculators, increasing hot money inflows and therefore further strengthening the peso. On Friday, following Fitch’s credit rating upgrade, the peso recovered to 40.80 to a dollar, up 27 centavos from Tuesday’s close of 41.07.

“Unfortunately, the peso’s strength is wreaking havoc on families of overseas Filipino workers. Their dollar, which used to give them P50, is now only worth P40.

“In a way, our economy also suffers, the household budgets become smaller and our employment is also affected because a stronger peso hurts our exports,” Diokno added.

He said that if the estimate that there are 10 million Filipinos working outside the country is correct, half of the country’s 96 million population is dependent on OFW earnings.

As for foreign direct investments, Diokno doubts that foreign investors would invest in the country’s industries owing to the credit rating upgrade.

“The FDIs are governed by separate dynamics. Foreign direct investors are interested in the cost of doing business, the power rates policy, stability and credibility,” Diokno said, citing the unclear policy of the government on mining as an example why foreign investors shun the Philippines.

“Our Constitution has some restrictive provisions. If I were a foreign investor, why would I come here when I can’t own the company’s controlling stake and I can’t even hire foreign managers?” Diokno said.

While the local bourse is an obvious winner in the credit rating upgrade, Diokno said only the wealthy and very few actually invest in the stock market.

“Our stock market is unlike the US’, where stock ownership is broader,” he added.

Still, Diokno said the credit rating upgrade should finally convince the government to ramp up spending instead of keeping the deficit low.

“One of the reasons why the government has not been ramping up spending on infrastrcutures is that they want to keep the deficit low because they want the trophy of a credit rating upgrade. Now they have it, and it should convince them to start spending,” he said.

Fitch also cited the low public investment among the various risks that the Philippine economy faces.

“The Philippines had a low fiscal revenue take of 18.3 percent of GDP in 2012, compared with a ‘BBB’ range median of 32.3 percent. This limits the fiscal scope to achieve the government’s ambition of raising public investment. The recent introduction of a “sin tax”, against stiff political opposition, will likely lead to some increment in revenues and underlines the administration’s commitment to strengthening the revenue base,” Fitch added.

Fitch warned that it could reverse the positive rating action if the Philippines is unable to continue the reforms undertaken as well as deterioration in monetary policy management and instability in the banking sector, among others.