Are the Philippine credit upgrades for real? Or mere puffery?

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There was a time when the credit upgrades/downgrades from the major rating agencies were held as gospels of truth. But the most credible were those from Standard and Poor’s or S&P, the world’s biggest rating company. A country or a company would complain in silence after being given a junk rating. Or would go into endless bouts of celebrations after a credit upgrade. The ratings, however, went on unquestioned and unchallenged.

The influence of the rating agencies was such that presidents and prime ministers, those obsessed with being called technocratic reformers, often touted credit upgrades as the by-product of their reformist bent. Leaders across the globe who relentlessly chased nice charts such as GDP growths and credit upgrades became slaves to the ratings of S&P and its ilk.

What leader would not give up a finger to get a Triple A rating from these supposed wise and fair institutions?

That was then. Today, a country with an economy as large as the US can get a credit downgrade—then get the reverse effect: better borrowing terms on a sustained basis. A downgrade a few years back on its creditworthiness was shrugged off by the US and the ultimate black eye was on the rating agencies. But the flawed country assessments were minor compared to the mountain of woes that the rating agencies face today.


According to suits filed by the US Justice Department, 19 states, the District of Columbia and California pension fund Calpers, the S&P gave top ratings to risky subprime mortgage bonds, which default led to the Great Recession in 2008. Despite warnings from analysts that the top-rated securities were either risky or junk, the top management of S&P still gave Triple A ratings to these risky bonds. The Justice Department said the mortgage giant lied to protect its clients but helped wreck havoc on the broader economy in the process.

In short, S&P was part of the wrecking crew that nearly pushed the global economy somewhere near the Great Depression. It failed as a wise and fair judge of sound investments.

After two years, the S&P recently settled the suits with a $1.35 billion payment to the US government and a $125 million payment to Calpers. The settlement cleared S&P of any or all criminal violations buts its initial swagger—and its position that the suits were related to the downgrade it had issued on US bonds—was gone.

Replying to the charges that it made bad calls to protect clients and harm the public, S&P admitted that its claims of objectivity did not constitute fraud as these were mere “puffery” that were standard in marketing.

The S&P also settled a case with the Securities and Exchange Commission, this time involving a 2011 inflated rating it gave on another mortgage-backed security. S&P paid a fine of $80 million on top of accepting a SEC-imposed 12-month ban which prohibits the rating giant from engaging in some branches of securities rating.

The issue of bad judgment made by the biggest CRA in the world would not have been relevant to the Philippine context were it not for one thing—the Aquino administration’s frequent basking in the glory of credit upgrades from the likes of S&P. In fact, were we to track the sources of pride of Mr. Aquino, these are easily the top three : GDP growth, credit upgrades and the approbation of the Davos crowd. Plus, of course, the puff pieces from foreign financial journalists who visit the country for a day or two, then write glowing pieces on the supposed economic miracles taking place in the country.

I will qualify the Davos crowd approbation. Praises from the Davos crowd and applause from the Makati Business Club. You must have seen the swagger of Mr. Aquino during the visit of Klaus Schwab.

As citizens, we appreciate those upgrades. You feel good when the country’s borrowing rates are the lowest that the market could offer. It is cheaper to undertake much-needed infrastructure projects such as roads and bridges, seaports and airports. Lower borrowing costs, though there are exceptions (troubled Spain borrows cheaper than steady UK), reflect on the economic health of the borrowing country.

There is everything to like about a country borrowing at the cheapest rates available.

The S&P’s $1.5 billion in payment for bad calls made prior to the Great Recession, which was documented in internal e-mails of S&P analysts that warned of a house burning down, plus the SEC–imposed fine and one year ban, raise serious questions about the S&P’s rating calls. What was more alarming was its admission that it resorted to “puffery” to attract clients.

The S&P actuations and conduct make these questions relevant. Were its upgrades on the Philippine creditworthiness for real? Or, were these upgrades made to serve the purpose of puffery?

If the S&P can rate dross as gold and claim that the ratings were a normal business practice, what can prevent it from hyping up the credit standing of countries that take immense pride in upgraded ratings, especially a country with a rating-obsessed leader such as Mr. Aquino? The Philippines under Mr. Aquino has been obsessed with this kind of paper chase – nice GDP charts and upgrades from the major CRAs.

If it wants to, it is quite easy for S&P to just turn a blind eye to certain flawed fundamentals and highlight the areas of strength to justify a series of upgrades.

Just like what it did in 2007 and 2011 to mortgage-backed securities in the US.

I do not know if Mr. Aquino would place less emphasis on credit upgrades the next time he speaks on the health of the Philippine economy. If he does not, such boasts on the string of credit upgrades will have a hollow, phony ring.

mvrong@yahoo.com

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9 Comments

  1. Credit ratings and GDP growth rates are metrics designed by the world’s actual rulers namely the international lending mafia that the IMF fronts for to measure a county’s ability to pay and to absorb more loans, after all lending is their business. A constant growth rate is what they need to see because thats what gives them their interest income while a contraction in the growth might lead to the thing they loath the most, that is a credit default. These metrics as you know by now, have nothing to do with the people’s welfare but the world has very little choice as we live in a lender’s world. A government that is not a captive of western lenders will prioritize not these metrics but will focus instead on food production and security, peace and order, health, education and jobs. How are we doing in these five areas? Regardless of where you stand in the yellow political divide, you know that there is only one answer to that question.

  2. This is. Facade rotten at the core .. The blood sweat and tears pay for this upgrade that only bring hot Money where oligarchs are able to inflate share prices , and issue more securities ,, jobs are lost because we neglect the SME’s .. We shift the tax burden on them to use these monies for the executive to buy political favors for his interests and that of his allies …. Too much crap

  3. This is. Facade rotten at the core .. The blood sweat and tears pay for this upgrade that only bring hot Monet where oligarchs are able to inflate share prices , and issue more securities ,, jobs are lost because we neglect the SME’s .. We shift the tax burden on them to use these monies for the executive to buy political favors for his interests and that of his allies …. Too much crap

  4. The most that our credit ratings can reach is B plus. Factors like our constitional prohibitions on foriegn land ownership will always be a deterrent. Only the real state industries are gaining grounds and the manufacturing sector is not improving. Next year it will be more cheaper to buy imported rice than the locally produced.

  5. Carl Cid Inting on

    Credit ratings are ephemeral and, often, rigged. That was demonstrated by the great subprime fiasco in 2008 when credit rating institutions connived with lenders (for a fee, of course) to give favorable risk assessments to obviously very risky assets. The credit ratings agencies suffered a great blow to their prestige and reputation, but were hardly ever punished for their wrongdoing and corruption.

    Ratings can also be transient. Take the example of Greece which, in the early 2000’s enjoyed “A” ratings. This allowed Greece access to a huge amount of credit at low interest rates. Greece even had the luxury to host the Summer Olympics in 2004. A few years later, Greece was verging on default.

    The lesson here is that ratings do not really tell the true story. It would be foolhardy to gloat over good credit ratings, much less boast about them. Ratings simply come and go, and the ones giving those ratings are not always objective.

  6. A survey is just it, a survey. There are many factors in conducting and translating a survey and the result depends on the material of the survey. Surveys should not be accepted, even considered as gospel truth. Economics is not fixed. It changes in consideration of many factors. Hence, given a positive or good rating does not make it accurate. Economic surveys, for example and it’s result will only serve as a guide, but not a judge of economic performance. Who knows that politics is also being considered in conducting and issuing a positive survey. Just like in the Philippines, there are surveys resulting in an upward economic performance but looking at the actual situation and status of the citizens in the survey, it does not show any improvement, in fact, the opposite is true. So, surveys can even be confusing for those ordinary folks how economy works. What is more confusing is that there are survey results showing that Philippine economy is stale and there are even forecasts that unless the economy will be stimulated with more spending, i. e. infrastructure, etc. we will be facing worse scenarios in the next years to come. So there, no reason to accept surveys as gospel truth.

  7. Pretty much like banks, anybody who hasn’t had to borrow from them don’t even get a rating. But who cares about ratings from these so called experts when all they are really are paid spin masters to those who can afford their exorbitant “rating fees”.

  8. Thank you for telling our people about this, Mr. Ronquillo. May God let you write more columns that call for more caring, competent and knowledgeable government policy and action for the large portion of our population who are poor.

    • Tyler Mcthausen on

      There is no god. only poor 3rd world countries like the phils. are enslaved by this imaginary sky daddy with religion as its side.