MANILA, Philippines - Depending on how foreign investors will regard the Fitch Ratings move, the upgrade to investment grade credit rating that the Philippines got today could trigger a rise in the resources that the government could use for its myriad development goals.
 |
A higher credit rating will most likely bring down the cost of borrowings for the government and eventually for the corporate sector. That will stimulate more economic activity, leading to sustained growth that, depending on how such growth can be made more inclusive, may finally trim the high rate of poverty in this country.
However, the new status could also weaken further the peso proceeds of the huge amounts of remittances—which contributed a large part of the strength in the Philippines' current account position that helped pave the way for the upgrade—although that may not yet spoil the push that the economy has been getting from consumer spending driven by the dollar inflows.
Stability in the monetary and banking sector, achieved over the past few years by the quality of management at the Bangko Sentral ng Pilipinas, was obviously a big factor that ensured the credit rating upgrade that many actually thought would come later this year or early next year yet.
“I thought it’s still Holy Week,” former Director-General of the National Economic and Development Authority Dante Canlas, expressing surprise, said on Wednesday when sought for comment. “Looks like Christmas came early for the Philippines.”
The investment grade upgrade, Canlas said, will lead to lower risk premium on Philippine sovereign debt, easing borrowing costs and debt servicing.
“That will free up budgetary resources for government spending on infrastructure, education and health, where there’s a good deal of unmet needs still,” Canlas said.
How the rating upgrade will further escalate borrowings through bond issuances remains to be seen. Recently a study released by the Asian Development Bank showed local-currency bonds issued by Philippine borrowers surging ahead by 20.5 percent to over P4.1 trillion as of end-2012.
That growth in local-currency bonds was the second fastest last year among Southeast Asian nations, topped only by Vietnam’s 43 percent, according to the Asia Bond Monitor published by ADB.
Nevertheless, interest rates paid by the government on its bond borrowings going down. Coupon rates, for instance, on 20-year bonds last week were around 3.625 percent, according to the Bureau of Treasury. That was favorable for the government which about six months ago was paying 5.75 percent for the same debt papers.
Should we worry that an investment grade upgrade would send the country’s foreign debt level soaring?
Last week, Bangko Sentral said that while total foreign debt amounted to $60.3 billion as of the end of 2012, that level represented 20.3 percent of overall economic output (as measured by Gross National Income).
Measured against gross international reserves of $83.8 billion, there was cover of 9.9 times in the case of short-term obligations, indicating no severe pressure on payments falling due within the year.
The upgrade by Fitch now shifts attention to the two other major international credit rating agencies, Moody’s and Standard & Poor’s. A similar move by these two, according to analysts, would encourage the flow of more foreign direct investment into the country.
In making the upgrade, Fitch noted the Philippines’ “resilient” economy which last year grew by 6.6 percent on the back of strong domestic demand. The growth was achieved despite weakness in the world financial markets, including the economies of the Philippines’ major trading partners.
Investments and exports have continued to account for small portions of recent years’ economic growth. Any major increase in these two sectors’ performance will sharped the sustainability of this economic growth, and perhaps its capacity to also positively affect the ranks of the poor.
Recent sentiments favoring opening up more sectors of the economy to foreign investors, which remain banned in a number of major industries, are already raising interest from overseas.
If new policies are put in place to make the economy more open, siginificant increases in FDI can be expected to follow, especially if governance concerns are also addressed by the government and private sector leaders.
In the past, strong indications of a surge in economic expansion were followed by disappointing policy moves by the political leaders. Whether the country’s politicians are no longer prone to shooting themselves in the foot remains to be seen, especially since elections are just around the corner.
No comments:
Post a Comment