Finally, the Philippines has received the much coveted and long-awaited investment grade from a major global credit rating agency.

London based Fitch Ratings on March 27 announced that it had upgraded the Philippines' "Long Term Foreign Currency Issuer Default Rating (IDR) to 'BBB­' from 'BB+'. T

The Long Term Local Currency IDR has been upgraded to 'BBB' from 'BBB­'. The Outlooks on both ratings are Stable. The agency has also upgraded the Country Ceiling to 'BBB' from 'BBB­' and the Short Term foreign Currency IDR to 'F3'from 'B'." Two other agencies—US based Standard & Poor's and Moody's Investor Service—are expected to follow their British rival's lead. The two both rate the Philippines at one notch below investment grade.

Credit ratings are used by investors as indications of the likelihood of receiving the money owed to them in accordance with the terms on which they invested. Fitch explains that the terms "investment grade" and "speculative grade" have established themselves over time as shorthand to describe categories 'AAA' to 'BBB' (investment grade) and 'BB' to 'D' (speculative grade). "Investment grade" categories indicate relatively low to moderate credit risk, while ratings in the "speculative" categories either signal a higher level of credit risk or that a default has already occurred.

Preferred borrower

In simpler terms, an investment grade makes the Philippines a preferred borrower and should be charged lower interest rates on its loans compared to lower rated borrowers.

At present, however, the Philippines and local companies are already receiving investment grade terms from creditors. San Miguel Corp., for instance, says it does not expect any significant impact from the

New sovereign rating because it is already enjoying low cost loans from the financial markets.

President Benigno S. Aquino III himself states: "The upgrade represents the perception of lessening risk in our markets; It formalizes the investment grade level at which the Philippines has already been securing credit." However, the upgrade will not mean much for Philippine companies who borrow huge amounts abroad and locally. "We were already paying very low interest rates prior to the upgrade," revealed the chief financial officer of a large conglomerate. For peso loans, for instance, giant San Miguel Corp. pays 4.3% for short term loans and 7.5% for long term. For dollar borrowings, SMC pays 2.1 to 2.4 basis points above LIBOR ­ the London Interbank Offered Rate.

"This marks the first time in history that our nation has been granted investment grade status by a major credit ratings agency. Greater access to low cost funds gives us more fiscal space to sustain and further improve on social protection, defense and economic stimulus, among others." - President Benigno S. Aquino III 

Fitch Ratings also announced on March 28, or a day after the announcement of the sovereign upgrade, that it had upgraded the credit worthiness of Philippine Long Distance Telephone Co. both as a foreign currency and peso borrower.

"As a long term borrower in foreign currencies, PLDT was upgraded to 'BBB' or one notch above investment grade from 'BBB­' with a long term grade of 'A­' or two notches above investment grade as a borrower of Philippine currency, and 'AAA' or three notches above investment grade when it comes to the Telco’s rating as a borrower Philippine company," according to a statement from Fitch's Seoul's office.

"The ratings reflect PLDT's dominant market shares with well over 60% in the wireless, fixed line and broadband segments at end­2012," the agency said. "The ratings also demonstrate the company's strong financial profile, including high EBITDA margins (2012: 46%)...." PLDT's rating could have gone up a notch higher but the upgrade was constrained by the Philippines' country ceiling of 'BBB' for a foreign currency transfer rating. Other companies have taken advantage of resorting to issuing much cheaper preferred shares, rather than straight loans. Preferred shares tend to have longer maturities and their rates are fixed.

For most Filipinos, however, an upgrade to investment grade also doesn't mean much. A third of Filipinos are below the poverty line measured as an income of $1.50 daily. Even with the current economic boom, jobs are not being created on a large scale. For instance, in the third quarter when economic growth was at 7.2%, more than 900,000 jobs were lost—an unusual phenomenon.

Beyond interest rates

Still, the President underscores the multiple benefits coming from the upgrade. "This marks the first time in history that our nation has been granted investment grade status by a major credit ratings agency," he notes.

According to Aquino, the upgrade means much more than lower interest rates and more investors buying Philippine government securities. "Greater access to low cost funds gives us more fiscal space to sustain and further improve on social protection, defense and economic stimulus, among others," he relates. "More companies in the real economy can now consider us 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 securities.

"This in turn enables industries to expand and generate more jobs for our countrymen—fostering a virtuous cycle of growth, empowerment, and inclusiveness that will redound to the benefit of Filipinos across all sectors of society." 

The chief executive considers the upgrade as an institutional affirmation of his good governance agenda. "Sound fiscal management and integrity based leadership has led to a resurgent economy in the face of uncertainties in the global arena," Aquino says. "It serves to encourage even greater interest and investments in our country." 

He declares: "It is one among many other positive developments that demonstrates the reclamation of our national pride: Truly, what was once known as the perennial laggard of Asia is taking off, and is accelerating towards its goal of an equitably progressive society."

Tetangco: Landmark achievement

Bangko Sentral ng Pilipinas Governor Amando Tetangco considers the upgrade as "a landmark achievement for the Philippines and is a recognition of the gains from the structural economic, financial and good governance reforms that have been implemented in the past several years." 

"The investment grade upgrade should inspire the entire government bureaucracy and the Filipino people to capitalize on the opportunities that will arise from the rating upgrade," he relates. "We should continue to work together not only to achieve higher credit ratings but also to ensure that the gains from these benefit most of our people." 

Tetangco, the only twice appointed BSP governor and recognized as one of the world's most outstanding central bankers, promises to remain committed to the "mandate of maintaining a stable inflation environment supportive of economic growth, and on enhancing governance standards of financial institutions in line with the national priority of good governance."

Infra spending up to 5% of GDP

For his part, Budget and Management Secretary Florencio B. Abad says the investment grade will pave the way for increase public spending on infrastructure. "With the country now at investment grade, we're determined to strengthen our economic position further and expand our fiscal space for key socio­economic services," he relates.

"At the same time, we expect to attract more investments into the country's infrastructure development program and, eventually, bring infrastructure spending to 5% of GDP."

Public spending for infrastructure is currently at 2.8% of gross domestic product (GDP), significantly lower than the international standard of 5% of GDP.

Higher infra spending will support the growth of key industries—agriculture, tourism and business process outsourcing (BPO)—through the construction of arterial farm­to­market roads, improving road

access to tourism zones and upgrading key airports and seaport hubs in tourist destinations.

Infrastructure spending will also buoy the administration's social services programs, such as social housing for informal settlers, rural electrification in remote sitios and barangays, the development of post­harvest facilities and the rehabilitation and upgrading of regional health units, as well as district, provincial and regional hospitals.

"While we funnel investments into industries with high growth potential, we will continue devoting resources to programs and projects that support our long term development agenda," Abad says.

"We're also looking at ways to support emerging, small­to­medium sized industries, as well as bringing down the cost of doing business in the country."

Finance Secretary Cesar Purisima, echoes President Aquino's statement that good governance is a major factor behind the ratings upgrade. "After successfully reversing a decade of decline in our credit ratings, President Aquino's tuwid na daan has led us to investment grade rating for the first time in our history," Purisima relates.

"This is the clearest and most definite affirmation that good governance is indeed good economics. Indeed, another historic first under the Aquino administration and a landmark achievement!"

Credit where it's due 

Former Presidential Spokesman and business writer Rigoberto Tiglao disagrees.

In his column published by the Manila Times on March 31, Tiglao recalled: "When it first upgraded the country from BB to BB+ earlier in June 2012, Fitch pointed out: "The Aquino administration's reform agenda has focused on tackling perceived shortcomings in governance and poverty... However, it will likely take time to feed through to the sovereign credit profile."

Tiglao also disputed Purisima's statement that the "country's ratings deteriorated during Arroyo's years."

Instead, Tiglao pointed out "that from 2002 to 2006 (the last rating under Arroyo), Fitch ratings were unchanged at BB. Understandably so since under Fitch's framework, it takes several years for it to be sure that a reform program would be entrenched, as it has obviously appeared to be by 2012."

Tiglao also criticized the Aquino administration for grabbing all credits for good developments and blaming its predecessor for everything bad. He cites the reforms made during the term of President Gloria Macapagal Arroyo, which were cited by Fitch in its latest upgrade decision.

Fitch, in its ratings statement, notes that the Philippines experienced stronger and less volatile growth than its 'BBB' peers over the past five years (President Aquino has been in office for just over two years).

GMA reforms, BSP policies 

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

The agency also cites the performance of the Bangko Sentral ng Pilipinas, which has established "a strong policy­making framework."

"Bangko Sentral ng Pilipinas' (BSP) inflation management track record and proactive use of macro­prudential measures to limit the potential emergence of macroeconomic and financial imbalances is supportive of the credit profile," Fitch relates.

"Inflation has been in line with 'BBB' peers on average over the past five years."

Tiglao cited presidential spokesman Edwin Lacierda's response when a reporter asked why Fitch gave credit to Arroyo: "What Fitch was referring to, according to Secretary (Cesar) Purisima, was the introduction of the value added tax. And that's the only contribution of the Arroyo administration."

According to Tiglao, the implementation of the expanded value added tax beginning in September 2005 led to the increase in revenues—from 12.5% of GDP in 2005 to 16.5% of GDP in 2007—"a level that the country under Aquino hasn't matched."

The columnist also pointed out that GDP growth accelerated to 6.6% in 2007 from 4.8% in 2005.

"Ironically, what Mr. Aquino and his cohorts railed against in 2005—the EVAT law—became the biggest factor for our country's credit upgrading by 2013," Tiglao noted.

On the other hand, revenues and GDP growth slowed down from 2008 to 2009 not because of mismanagement but because of the US­led global financial crisis. Still, the Philippine economy survived with a 1.2% growth in 2009 (down from 4.2% in 2008) while "all our Asian neighbors declined."

"It was this crisis that the Fitch referred to when it said that Arroyo's 'improvements in fiscal management made government's debt dynamics more resilient to shocks,' a requirement for a country to be rated investment­grade," Tiglao also cited the International Monetary Fund's favorable observation to the P330­billion Economic Resiliency Plan or stimulus package to cushion the impact of the global crisis.

In its 2009 "Article IV Consultations" report, the IMF said: "Fiscal policy easing in 2009 was appropriate and effective... so that the Philippines avoided a recession many countries experienced as a result of the global financial crisis."

Weak governance standards

In its latest ratings decision, Fitch Ratings notes that the Philippines had low fiscal revenue take of 18.3% of GDP in 2012, compared with a 'BBB' range median of 32.3%.

"This limits the fiscal scope to achieve the government's ambition of raising public investment," the agency says. "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 also observes that governance standards, as measured in international indices such as the World Bank's framework, remain weaker than 'BBB' range norms but are not inconsistent with a 'BBB­' rating as a number of sovereigns in this rating category fare worse than the Philippines."

The Philippines' average income is low ($2,600 versus 'BBB' range median of $10,300 in 2012), although this measure does not account directly for the significant support to living standards from remittance inflows," Fitch says. "The country's level of human development (as measured in the United Nations Development Program's index) is less of an outlier against 'BBB' range peers."

Stock market boost

The stock market felt the most immediate impact of the upgrade in the country's credit rating. The Philippine Stock Exchange main index (PSEi) set a new all­time high on March 27, driven by the positive

sentiment generated by the Fitch Ratings upgrade of the Philippines' sovereign ratings to investment grade status.

The PSEi closed higher for the fifth straight session at 6,847.47 points, surpassing its finish of 6,835.21 on March 6.

The benchmark index also gained 182.35 points during the day, its highest one day point increase since Aug. 21,2007, while percentage­wise, the 2.7% rise was the biggest since May 17, 2012. Intraday, the PSEi reached another record level at 6,873.89, beating the previous record level of 6,867.10 achieved on March 11, 2013.

Year­to­date, the PSEi has grown by 17.8% or 1,034.74 points. The main index has also recorded new closing highs by a total of 24 times in 2013. Astro del Castillo, managing director of First Grade Finance Holdings, says the upgrade will encourage the conservative funds, which has adopted a wait¬and¬see attitude, to come out and join the booming stock market.

"We are now officially an investment grade country with this upgrade by the Fitch Ratings agency and this is an achievement that we all should be proud of," PSE President and CEO Hans B. Sicat said in a statement.

"We have been talking about this in the past 12 months and we think it is well deserved."

"Hopefully, the other rating agencies will follow suit so we can start seeing more investors participate in the growth of our listed companies and the economy," he added.

No automatic wave of FDI 

Foreign direct investments (FDI), which are essential to long term economic growth, will not automatically follow an investment grade.

"There will be more FDIs from institutional investors who are restricted from investing in countries below investment grade,lnterAksyon.com” the online news of TV5 quoted Employers’ Confederation of the Philippines (ECOP) President Edgardo G. Lacson as saying.

European Chamber of Commerce of the Philippines (ECCP) Executive Vice President Henry J. Schumacher, also quoted by InterAksyon, said: "It's great and I congratulate the government for having achieved it. But not having investment grade was not the reason for extremely low foreign direct investments. Those reasons need to be addressed to achieve productive investments leading to job generation and inclusive growth."

The much­publicized Public­Private Partnership (PPP) program, launched early in the Aquino administration, has so far failed to put a big ticket project on the construction stage.

Many of the big­ticket rail (LRT­1 South and LRT­2 East Extensions) and toll road (Cavite­Laguna —CALA Expressway) projects were ready for bidding as early as 2010, according to the second annual as­

sessment of Arangkada, a compilation of more than 400 recommendations from the Joint Foreign Chambers of the Philippines to speed up growth.

Among the three ready­to­go projects, only LRT­1 South has been tendered (in November 2012). CALA was approved for bidding only in January 2013.

An Arangkada point out that poor infrastructure is a key inhibitor to higher investment. No wonder: net foreign direct investment remained totaled only $2 billion in 2012 much lower the amounts received by Indonesia, Malaysia, Singapore, Thailand and Vietnam in the Association of Southeast Asian Nations (ASEAN).

InterAksyon also quoted American Chamber of Commerce of the Philippines (AmCham) Senior Adviser John D. Forbes as saying: "The upgrade significantly improves the climate for financial investments, but for brick and mortar FDI, market size and competitive production costs are more  critical factors than financial ratings."

The Philippines should look at the experience of the BRICS (Brazil, Russia, India, China and South Africa) nations, where "sustained growth has been neither inevitable nor automatic," according to Dr. Dan Steinbock, research director of international business at the India, China and America Institute (USA) and a visiting fellow at the Shanghai Institutes for International Studies (China). 

"It must be made to happen," he stressed. "It must be realized."

In an article published by the Philippine Daily Inquirer April 1, Steinbeck noted that for the BRICS nations, which met for their fifth summit in South Africa last week, the growth prospects in are no longer immune to the severe debt crises in the West.

Steinbock believes that in the short term, India and South Africa may be at the biggest risk of sovereign­rating downgrade.

"Among the emerging economies, the Philippines is best placed for an upgrade," the Inquirer quoted Steinbock as saying.

"It is favorably positioned to sustain growth in an exceptionally grim international landscape."

He cited a Goldman Sachs report a few years ago that identified the group of potential successors to the BRICS, where "the Philippines also made it into the list, in the footprints of two other major Southeast Asian nations—Indonesia and Vietnam— that have attracted much more foreign direct investments so far."

Steinbock cited the Philippines' 6.6% growth in terms of gross domestic product (GDP) in 2012, which topped all other countries in Southeast Asia. "The acceleration of domestic demand since the first quarter of 2012 reflects the country's solid macroeconomic fundamentals, stronger government finances, and high confidence in the Aquino government's commitment to reform," Steinbock relates.

"Nonetheless, significant challenges of poverty remain," Steinbock stresses.

"Growth is not yet inclusive." He says "weaknesses remain to be addressed, including the poor infrastructure, various market inefficiencies and labor market rigidities."

"As the Aquino administration knows only too well, the economy needs to shift from consumption toward investment, both public and private," Steinbock notes. "Sectorally, this requires rising productivity in agriculture, while requiring less dependence on low wage and low­skill services and more on labor­intensive manufacturing and high value services."

Despite the high growth rate in 2012, unemployment rate in the Philippines stayed at 7%, while underemployment rate rose to 22.7% because the number of full­time jobs declined by half a million between 2011 and 2012.

Steinbock predicts that in the next five years, GDP growth rate in the Philippines could climb close to that of China. "In order to be sustained, this growth must become more inclusive, however," he stressed.

Paid rating 

"Lest the Palace start believing its own press release, the recent credit rating upgrade ought to be placed in its proper perspective and context," cautions lawyer Dodo Dulay, writing in the Manila Times April 2. He explains: "First off, Standard & Poor's Rating Services (S&P) and Moody's Investor Service the two largest credit rating agencies in the world—still rate the Philippines below investment grade.

"Moody's gave the country a Ba1 rating last October while S&P put its BB­plus rating in December 2012. Fitch's rating upgrade is not a guarantee that S&P or Moody's will follow suit. "Second, it was the Aquino government that requested (and paid for) a rating from Fitch. Fitch only does solicited ratings, meaning, it only issues a rating if an "issuer" like the Philippines, requests a rating, pays the rating fees and provides the rating agency with private information about the country (oftentimes referred to as "issuer pay model"). 

"And as is usual, an issuer gets a higher rating after having solicited a rating from a rating agency like Fitch. This is probably the reason why the country received eight credit rating upgrades during the Aquino

Administration. "Third, the credit rating upgrade will not significantly lower borrowing costs for government debt because, as admitted by the head of Aquino administration's economic team, Finance Secretary Cesar Purisima, the bond market had already been pricing the Philippines as investment grade even before last Wednesday's actual upgrade.

"Fourth, the investment­grade rating was achieved, in no small measure, through the fiscal and budgetary policies implemented during the administration of the Palace's reviled (and favorite) nemesis—former president Gloria Macapagal Arroyo."

"Moreover, many financial analysts point out that for developing economies like the Philippines, an investment­grade rating is a product of years of fiscal discipline. They cite, for instance, Indonesia, which was promoted to investment grade only after 14 years of "junk" ratings. The Aquino administration, however, would have us believe that they did it in less than three.

"Fifth, the Philippines' balance of payments surplus—a key driver for the ratings upgrade—was principally generated by the sector that the Aquino administration had no control or influence over: the millions of overseas Filipino workers. Due to the remittances of our OFWs, the country's foreign currency assets (or savings) exceeded its public and private liabilities, hence, the so called surplus.

"This also means that the money sent by Filipinos working overseas to their families back home—some $29.31 billion last year remains a stable (and growing) source of income for the government.

"Undoubtedly, the OFWs' remittances helped fuel consumer spending and boosted the country's economic growth despite the general weakness in the global economy.

"Lastly, the rating upgrade will not automatically bring about substantial economic growth. That's because an investment grade rating merely lowers the cost of government borrowing and provides access to cheaper funding in international bond markets.

"It does not, and will not, open the floodgates for job generating foreign direct investments (FDI)— the core of real and sustainable economic growth. Vietnam, for example, has received "junk" rating for the

past several years. Yet, FDI inflows to that country reached $8.4 billion in 2012.

"Even unrated Cambodia and Myanmar managed to attract more FDI last year—$1.8 billion and $1.9 billion, respectively compared to the Philippines' measly $1.5 billion.

"Clearly, unless and until the Aquino administration undertakes radical reforms to drastically lower the cost and improve the ease of doing business in the country, an investment grade status will have no positive impact on the lives of our impoverished countrymen," concludes Dodo Dulay.

Source: BizNewsAsia; Cover Story; 15 April 2013