Crossroeads (Toward Philippine economic and social progress)
Philippine Star, 30 January 2012
The government is keenly sensitive to the credit rating given to the Philippines as borrower in the world capital markets. Credit ratings are made by professional rating agencies to provide assessment on a particular borrower’s (corporate or government) likely ability to repay its debts.
A credit rating change could be significant. An upgrade in rating for a borrower would mean a reduction in the cost of borrowing in the capital markets. A downgrade could worsen the cost of debt. Thus, a rating change has important consequences on a debtor.
Achieving first-level “investment grade” status for the Philippines is a major objective by the Department of Finance. Investment grade begins with a BBB rating and there are other gradations. An AAA rating is the highest grade.
The expectation is that an investment grade rating is forthcoming. The reports of the credit rating agencies have shown optimistic tendencies especially after the government successfully passed the sin tax reform and the reproductive health law.
The credit rating agencies. Three major international credit rating agencies dominate the business: Standard and Poors (S&P), Moody’s and Fitch. Although they follow different rating approaches, all three essentially examine the same economic data for their assessments.
The current ratings for the Philippines are “BB+” (Fitch), “Ba1” (Moody’s), and “BB+” (S&P). Each of these agencies also provides an “outlook” rating, with Fitch and Moody’s giving a “stable” outlook and S&P a “positive” outlook for the country. All these imply a rating just one notch short of investment grade.
GNI compared to GDP as basis of comparison. There is one area where all three rating agencies might be using a wrong metric for calculating the strength of the Philippine economy. All three rely on the GDP as the basis of comparing countries.
There is a today a significant divergence between the country’s national income (as measured by the Gross National Income or GNI, which was known generally before as the Gross National Product or GNP) and output produced during the year (known generally as the Gross Domestic Product or GDP.)
Philippine GNI is 1.33 times more than GDP (or, the GDP is 75 percent of the value of GNI). For almost twenty consecutive years, the country’s national income has been outpacing and exceeding the growth of the GDP. The GNI has exceeded, year in year out, the level of the GDP, which represents the measure of total output produced in the country on an annual basis.
To illustrate, in 2000, the GNI was 17 percent greater than the GDP. In 2010, GNI was 33 percent more than the GDP. (In specifics for 2012, GNI was 11,996 billion while GDP was 9,003 billion, both in current pesos of that year.)
This situation has accounted for the surplus in the country’s balance of payments position. The additional income has been in the form of worker’s remittances in foreign currencies which have elevated the foreign exchange earnings of the country.
Implications of difference in GNI and GDP. It is therefore important to examine what would happen if the GNI were used as the basis for examining the fiscal space available to the government instead of the GDP.
First, the level of national debt and its servicing is immediately less burdensome. In other words, there is more room created to incur more debt and hence also more room for the servicing of debt.
Let’s see this in numbers. We use Philippine data. In 2010 values, general government debt as a percent of GDP is 45 percent. As ratio to GNI, this is 33.8 percent. A fiscal deficit level of 2.0 percent of GDP becomes only 1.5 percent of GNI. And interest cost of 3.3 percent of GDP is only 2.6 percent of GNI.
Second, the level of saving generated in the economy is higher. Saving is derived by deducting consumption expenditure from GDP or from GNI. Again for 2010, the amount of consumption (both household and government) is around 80 percent of GDP so that saving is 20 percent of GDP. In terms of GNI, the consumption expenditure is 60 percent of GNI, implying that saving is 40 percent of GNI.
Third, the level of tax and revenue effort appears to fall in a drastic way. Overall tax revenues as a percentage of GDP, for instance in 2010, was 17.2 percent of GDP. This implies that the same revenue as a percent of GNI was 13.4 percent. Thus, this tells us that information would appear to show that it falls badly and it would seem that the country’s position worsens.
But this should not be the case. The income flows received from abroad cannot be subject of domestic tax when it enters the economy initially. Such incomes have been taxed in the country jurisdictions where they have been earned, mainly as labor income by Filipino workers. Thus, the tax revenue ratio to GNI need not be treated in a similar vein as a measure of the tax effort as in the case of the tax revenue to GDP ratio.
Like the impact of export earnings, these income flows have provided strength to the country’s economic fundamentals through their impact on the balance of payments. Additionally, they have contributed toward lightening the impact of the volume and fiscal burden of the public debt. Additionally, they prop up the country’s aggregate saving in a dramatic way.
For the Philippines, the GNI is a better gauge in measuring the country’s fiscal situation on the debt side but not the level of tax resource generation. The rating agencies, using traditional methods of comparison used by the development institutions like the World Bank, will always use the GDP as the metric for performance when, as is often the case, the GDP and GNI are relatively equal.
There are however outlier countries that cannot be lumped with the assumption that GDP and GNI are the same. The Philippines is one such extreme outlier. In such cases, special recognition needs to be given in the uniqueness of the Philippine metric for measuring the income position of the country concerned.
