Fitch
Ratings’ upgrade of the Philippine economy from non-investment grade BB+ to
investment grade BBB is indeed good news.
For
starters, there are three other investment grade status that the Philippine
economy and Philippine-based companies can aspire to reach: A, AA and AAA, with
the latter as the most stable, most reliable status. There are intermediates of
+/- between these grades, like A-, A,
A+.
For
the non-investment grade, the rates range from D (defaulted on some obligations
and can default more) to C (vulnerable to bankruptcy) to CCC, B and BB. Again,
there are intermediates between these rates.
There
are two important factors why this upgrade to investment status of the
Philippines was made.
First,
internally, the Philippines’ macroeconomic fundamentals have indeed improved,
like high GDP growth, low inflation and interest rates, sustained current
account surplus (CAS) with high remittances from OFWs, and so on. These were
elaborately discussed by Fitch in its
Full statement on the Philippine ratings upgrade.
Second,
the external environment in the major economies like the Eurozone and North
America remains unstable if not weak. Fitch has mentioned this only in passing.
Financial instabilities like the cases of Cyprus and the PIIGS (Portugal,
Ireland, Italy, Greece, Spain), many businesses there want to get out and countries
abroad that offer certain stability and protection of investments and
profit are potential target as destination economies.
The
Philippines has several economic and policy gaps that appear “far out” compared
to many economies that are given the ‘BBB’ investment grade. These include:
*
Low per capita income, only $2,600 vs. ‘BBB’ range median of $10,300 in 2012.
Level
of human development index (HDI) as measured by the UNDP is less of an outlier
against ‘BBB’ range peers.
*
Low fiscal revenue of only 18.3 percent of GDP in 2012 vs ‘BBB’ range median of
32.3 percent.
Still,
Fitch was not deterred from upgrading the country’s status to an investment
grade.
Actually,
the reason why the country’s Tax revenue / GDP ratio remains “small” and below
20 percent for many years now is because they only compute national government
tax revenues and not tax and other revenues by the local government units
(LGUs). The big cities in Metro Manila for instance earn a lot of local
revenues from business permit taxes and fees, real property tax and other
revenues. If those revenues by LGUs are included in the numerator, the T/GDP
ratio can easily reach 20+ percent of GDP.
Advantages
of Ratings Upgrade
The
advantages are obvious. For one, it improves the overall business and economic
environment of the country. It’s a “vote of confidence” and more investors,
bringing in either direct or portfolio
investments, will come to see and feel the various business indicators on the
ground.
Two,
it reduces the interest rates of PH government and corporate debts, present and
future. Thus, for firms that think they have a good business project and cannot
raise enough local funds, borrowing abroad will be easier and cheaper.
Three,
it inspires the local players, private and public, to work harder and more
efficiently as more eyes around the world are looking at them.
There
are certain threats of course, not necessarily disadvantages, as a result of
this investment upgrade.
One
is moral hazards problem. If it is cheaper now to borrow because of the lower
interest rates, then the government and some corporations will be tempted or
encouraged to borrow more than what they need and hence, raise or the debt
stock instead of retaining or reducing it.
Two,
it may divert the attention of the government and private players away from
certain structural reforms and just focus on the plus factors listed by Fitch.
Such as encouraging more OFWs and attracting more BPO companies that
significantly improve the country’s CAS.
Among
these important structural reforms are the reduction in business bureaucracies
and red tape, and government corruption in general, improvement in power supply
and road infrastructures, and removing foreign equity restrictions in the
Constitution.
The
elections this coming May will be observed by many investors abroad who are
still on the Wait-and-See attitude. Not so much of who won, but how credible
and honest the conduct of election was. Because it is an important indicator or
proxy for how much the country’s political institutions promulgate the rule of
law and how much they will protect contracts, private property and profits.
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See also:
Fat-Free Econ 38: Jobless Growth vs. Jobless Non-Growth, February 12, 2012
Fat Free Econ 39: P57,000 Public Debt Per Filipino, February 25, 2013
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