By: InterAksyon.com
Fitch Ratings on Wednesday gave the Philippines a historic thumbs up, rating the economy "investment grade" for the first time ever.
There is no spoiling this development. It is good news. Our leaders deserve credit as well as some basking in the limelight. By leaders though, it's important to stress that this refers to both Gloria Macapagal Arroyo and Benigno Aquino III. The former's government for initiating the reforms that Fitch says made the Philippines resilient at a time of great global chaos, and the latter's administration for following through on those reforms, while also layering on top of everything a great push for transparency and good governance.
Beyond the government, the millions of overseas Filipino workers (OFWs) also deserve credit for helping bolster the country's current account surplus, which Fitch Ratings acknowledged as one key to the whole Philippine story. OFWs contribute to the surplus through their remittances, which already accounts for 10 percent of GDP. Remittances help the economy in more ways than one. Money OFWs send home to their loved ones also finance consumer spending, which make up two-thirds of GDP and has propped up the economy especially during times when weak global demand take the kick out of our exports.
While there has been universal cheering, the news was greeted by two distinct messages. The stock market, in a frenzied, eve-of-a-long-break rally, surged to a fresh record. On the other hand, businessmen cautioned that an investment grade rating will not automatically lead to an influx of foreign direct investments, or FDIs – the clearest indicator that jobs will be created.
The public must understand what it all means. What, indeed, is supposed to happen, now that Fitch Ratings has promoted the Philippines to investment grade?
The textbook mantra is that investment grade status would bring down borrowing costs for the government, and by extension, for the private sector.
Investment grade also would supposedly open the floodgates to more foreign investments, specifically more conservative companies and funds that, by their own rules and mandates, are not allowed to place any money on non-investment grade - also called junk - rated markets.
No surprise then that Philippine stock traders, in a fit of rapture on the eve of Maundy Thursday, piled on to a "monster rally", on expectations that other foreign fund managers - who until Tuesday had considered us "junk" - could now be expected to place some bets on one of the smallest, thinnest, yet fastest-growing bourses in the region. This party just got way cooler, and we're expecting more (paying) guests. Net foreign buying at the PSE hit P1.35 billion on Wednesday.
The hope, which abounds among the country's economic managers, is that portfolio money (the short-term funds that mostly swirl in and out of markets generating profits for traders but not much for anybody else) would be followed by the job-generating FDI. With this, the Philippines' economic growth can finally shift from its current consumption-led tack to one driven by investments - something that has higher value-added and so is more sustainable. People can start betting on the Philippines, and not just on the stocks traded therein.
PNoy's economic managers yearn for this because FDIs comprise the most conspicuos missing ingredient in three years of economic growth. Even the record-breaking expansion last year was not accompanied by any meaningful job gains. Picture this: Philippine GDP grew 6.6 percent - which is above the 5 percent 10-year average – and yet it hardly made a dent in the country's unemployment, which, after being excused of more than 10 million jobs generated and found everywhere else but the Philippines, held at more than 7 percent.
In the meantime, the ranks of the country's billionaires have increased, pointing to a growing divide between the haves and the have-nots. Not something one can gloat about, especially during an election year.
But does FDI really follow the herd of portfolio flows?
Unfortunately, not necessarily. Investments in financial assets such as stocks and bonds are considered short-term bets because they’re easier to pull out when the party is over - they're electronic transfers, which is why portfolio funds are also called "hot money." Most people won't see – much less benefit from - any of that, except maybe to see it on cheap ink, or cheaper pixels, as magnified by the news. Beyond that, ni anino, as Filipinos like to say. Not even a shadow of it.
FDI, on the other hand, involves sinking - literally – thousands, millions, and tens of millions of dollars in equipment, factories, technology, job hires, etc.
And there's the rub.
What draws the bricks-and-mortar FDI into a country is more than just an investment grade rating. More crucial for such investments are infrastructure (transport, telecoms, energy etc.), reasonable and ideally stable, predictable, understandable government regulations and fees; in short, an environment that is conducive to doing business.
Unfortunately again, the Philippines has failed to make headway in these chronic concerns. According to the Doing Business Report of the World Bank, no meaningful change has happened in the last two years. Not in infrastructure, not in energy, not in the bureaucracy and red tape that remain as mind-numbing and paralyzing to potential investors as it is for any Filipino who simply wants to earn a driver’s license, pay taxes, or make it to their planes on time. The cost of doing business in the Philippines remains prohibitive. Meanwhile, the government has all of two (2) projects successfully bidded out for its cornerstone public-private projects. As another indicator of where infrastructure is headed, we've actually missed targets for spending.
Does this mean we're still stuck with more of the footloose-and-fancy-free-type of investments for now? Well, yes and no.
Yes, because the the short-termers have been here for the last year or so, helping fuel the stock market's rally to stratospheric highs - 24 record highs in the first quarter alone! – and in the immediate term, Fitch's message (or that of the traders, actually) is that they ain't seen nothing yet (down at the trading pits, to be precise). Understandably, some foreign fund managers, especially those that failed to ride on the PSE's surge since last year, may rethink bailing out of the Philippines following the rating upgrade. They may stay awhile, if only to appease shareholders who are aghast at why their fund manager failed to make money on Southeast Asia's new emerging tiger.
In fact, portfolio flows have become a problem of late, especially to the Bangko Sentral ng Pilipinas (BSP), which has been incurring losses by tempering the peso's appreciation. After all, the law of supply and demand requires that a flood of dollars flowing into the country should cause the peso to rise in value.
Which brings us to the "no" part of the equation. Additional hot money flows depend not only on the credit rating of a country, but more so on the relative risk-reward conditions (as defined by interest rates, earnings outlook, inflation, etc) of the Philippine and other markets.
As of Wednesday evening, the US stock market had risen to new highs, triggered by a slew of positive data in the world's biggest economy. Meanwhile, the PSE, following its surge, had become one of the world's most expensive markets, with price-to-earnings (P/E) ratios at upwards of 20 times.
And what goes up must come down. This explains the corrections in previous sessions, with investors using a banking crisis in Cyprus as an excuse to take profit – or in other words, to sell. This also explains the BSP's conundrum and why the investment grade rating at this time is welcome yet redundant.
The Philippine economy is drowning in money (courtesy of portfolio funds, remittances, etc) such that thousand-peso bills are coming out of bankers' ears. To encourage banks to lend out more, the BSP already cut its overnight rates and SDA rates to record lows. Treasury rates likewise have slumped, as the excess liquidity has been a boon to government. To prevent this excess money from fueling inflation, the central bank has been egging on the national government to tap this liquidity for its financing requirements instead of borrowing abroad. The Aquino administration has obliged, announcing a week ago that it was turning to the domestic market to finance bulk of its budget deficit.
The previous paragraph simply means this: No, dude, interest rates on that car or housing loan you wanted to take out, or on your credit card debt, won't go down as a result of the Fitch rating upgrade for the Philippines.
No less than the head of PNoy's economic team, Finance Secretary Cesar Purisima, acknowledges that except for Fitch and the two other major credit rating agencies, the financial markets had been pricing the Philippines as if it were investment grade – long before Wednesday's actual upgrade. Any potential benefit on interest rates has already been factored in.
Which should make every Filipino, acting alone or with a partner here or abroad, think: if the interest rates have been low for the longest time and you still haven't taken the bait to invest in anything more meaningful and longer term than stocks – if you're still betting on shares rather than the country – well, why indeed is that?
It's because it's not really the investment grade you – or everybody else – have been waiting for.
To be sure, there is substantial reputational gain from Fitch's affirmation of the Philippines' investment grade status. No wet blankets here.
But people’s expectations must be managed, if only so they can better focus on what they still need to demand.
The challenge for the Aquino administration is to take advantage of this new level of goodwill by unlocking the infrastructure bottlenecks, addressing the cost and ease of doing business, and deepening social reform. Only by doing so can it hope to distribute the dividends of the newfound economic growth to all Filipinos, and will the newfangled rating of being "investment grade" mean anything to the larger society.
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