Crossroads (Toward Philippine economic and social progress)
Philippine Star, 9 October 2013


One strong positive factor for Philippine development materialized with the release a few days ago of Moody’s investment grade credit rating for Philippine sovereign debt.

Whenever an outside reputable agency makes a judgment about us, it should be cause for serious attention. These independent reviews become benchmarks used by other investors and businesses. Moody’s Investors Service provides information for other major players in the world’s capital markets. Their judgments – like those of other agencies in the same business – represent a specialist’s provision of information critical to decision making by other investors and lenders.

In this business, there are three leading credit rating agencies and a satellite of many other credit rating agencies at the national level. The leading credit rating agencies were once national credit rating agencies. But their scope has extended to international work because of the large network of credit that happens in this increasingly globalized economy. That they pay careful attention to our status shows the significance that we play as a part of this global framework.

Moody’s credit upgrade puts the Philippines firmly on investment grade. Moody’s Investors Service is the last of the major credit ratings given to Philippine sovereign credit. In March 2013, Fitch made the first investment grade call, followed by the same upgrade by Standard & Poor’s in May. Moody’s held out until it released its recent credit rating.

The Moody’s upgrade – a rise of its credit rating from Ba1 (below investment grade) to Baa3 (initial investment grade) – provides a big boost to us. It affirms not only what the two previous credit ratings have done. Its upbeat appraisal of Philippine economic conditions marked by a strong endorsement with a “positive rating” means that the economy is looking further upward, not just staying steady.

To use its own assessment, Moody’s said: “The Philippines’  economic performance has entered a structural shift to higher growth, accompanied by low inflation.” Moody’s praises the government’s improved fiscal management.

Thus, for the first time, the country enjoys an investment grade rating from three important private sector credit rating services. A unanimous verdict as in a boxing match is not only affirmative news of strength. It is superlative news about the nature of the achievement and a harbinger of future expectations.

Apart from these credit rating companies that are critical toward providing some credit ratings to Philippine borrowers, Japanese credit rating agencies have also improved their credit ratings of the Philippines. These credit rating agencies assist their clients in this country for credit information for their own needs.

Secondary impact of credit rating upgrades. The immediate impact of a credit upgrade is the reduction of borrowing costs for an economy. While the matter of exact cost reduction depends on case to case projects, a rating upgrade sprinkles benefits across all credit transactions for the country, especially those that are based on renewals or extensions of credits.

Improved credit terms benefit not only government credit but also private credit. While it matters from case to case, a rising economy is made up of improving parts, and often some of those components are the very reason for the success of the whole.

In the Philippine case of late, because of early work on the strengthening of the capitalization requirements of domestic banks, Philippine commercial banks have played a leading role in propping up overall economic performance. They have shown that such reforms at capitalization increases provided elements of strength against the financial stresses arising from regional and international tensions.

In fact, almost simultaneously with the release of the upgrade for Philippine credit, Moody’s also announced major decisions concerning the credit ratings of four Philippine banks and two major Philippine government corporate entities.

Thus, in separate moves, Moody’s has also upgraded the credit ratings of four major Philippine banks – BPI (Bank of Philippine Islands), Metrobank, BDO (Banco de Oro), and the Land Bank. In addition to this, the credit ratings also for Philippine state corporations have improved, meaning these agencies can now access improved credit terms too. This was also the rationale for the upgrades enjoyed by PSALM (Power Sector Assets and Liabilities Management Corp.) and National Power Corporations, two big borrowers in the world market.

The secondary impact further works this way. If Philippine banks reduce their cost of debt finance, this benefit could also translate in terms of lower costs to their domestic clients. Hence, the benefit of lower credit costs is shared by domestic companies that access bank finance.

Also, this credit upgrade rubs off on Philippine companies, of course, depending on their own credit worthiness. Companies that operate within an investment rated country share in the aura of an improved investment and business framework that take place. As further confidence builds up, so does business.

The overall world and economic climate is still down. It is to be recalled that world and regional economic conditions are still not in tip-top shape. What is unique about the Philippine position at this point is that it appears to be approaching A1 condition in the eyes of the world development community in a time of economic weakness almost everywhere.

The Philippines is on course towards a steadier future, with economic growth continuing to surge. The year-on-year seven-percent growth rate is now what the Asian Development Bank expects to happen in the Philippines, putting the country in an infectiously upbeat mood.

The situation in other neighboring East Asian countries is not as optimistic. Growth rates have leveled off and the Philippines is likely to perform much better than most countries. In fact, while the outlook is positive in the Philippines, for other ASEAN countries, the problem is that of weaker expectations.

For instance, Malaysia and Indonesia, though their ratings are investment grade their short-term ratings were reduced to “stable” from “positive,” a kind of downgrade. These assessments were made only recently; in the case of Malaysia, by Fitch in July this year, and for Indonesia, by Standard and Poors in May.

It is well to remember that the best choice in the worst of times may not be the best choice when times are superb. This should be a reminder to us that there are many things to do still to move to the front ranks among the best. Our country ranking in various international economic indicators covering competitiveness and doing business should be enough reminder.

There are reforms to be done – in foreign direct investments, in public investment undertakings, in labor market policies, in fiscal and revenue management, in governance, and in peace and order.