(Updated with an additional note at the end of this column, explaining a correction about the distinction between BMI as a research unit and parent firm Fitch Ratings.)
BMI Research over the weekend released a startling and possibly unprecedented report, one that drew the unambiguous conclusion that a Grace Poe election victory would bode well for the country in terms of economic policy, and that a win by Rodrigo Duterte would be bad news.
BMI is the research unit of Fitch Ratings. Fitch, along with its peers Standard & Poor’s and Moody’s, generally avoids making politically-charged statements even after a new President takes office, which is why the report over the weekend was unusual; it appears to be the first time an institution with the stature of one of the big three ratings agencies has made a clear endorsement (and an equally unequivocal un-endorsement) before an election.
BMI’s conclusion is certain to be welcomed by Grace Poe and her supporters, while Duterte and his supporters could just dismiss it as illegitimate prattle from foreigners who have no business commenting on a Filipino affair, and I wouldn’t want to imagine they would go to the extreme of threatening to burn down Fitch’s offices. The state of the media business being what it is, those reactions are the focus of the news, but they shouldn’t be, because there is a much broader message in BMI’s report, whether one agrees with its conclusion or not.
One has to remember that there is an actuarial aspect to Fitch’s business. A couple of weeks ago, Fitch kept its sovereign rating for the Philippines at BBB-, the lowest investment grade, but raised its outlook from “stable” to “positive.” The release of the BMI analysis now, just a week before the election, means that Fitch believes the risk of a negative change to the status quo (represented by its BBB-/positive rating and outlook for the country) is high enough that a warning should be issued.
The practical message is that the outcome of the election will determine whether Fitch will keep its credit rating for the Philippines the same or lower it by at least one notch, and whether it changes its outlook. A Grace Poe election win will result in the BBB- rating being kept with either a positive or stable outlook, depending on how smoothly her transition to the Office of the President is accomplished. A Rod Duterte victory might result in a ratings downgrade, and will reverse Fitch’s outlook for the next 12 to 18 months to negative. The most obvious consequence of that is that it will make government financing more expensive; lower credit ratings mean higher bond yields, adding an extra degree of difficulty to the new administration’s debt and budget management.
Another implication of BMI’s report, one that supporters of Mar Roxas and Jejomar Binay must find particularly alarming, is that the ratings giant has essentially written them off. About two weeks ago, BMI’s analysis included the four leading candidates; since then, Fitch’s researchers have evidently determined that the chances of a Roxas or a Binay presidency are so remote, those scenarios are not even worth discussing. The irony in that is Roxas and Binay probably have the most articulated economic views of the four top candidates; nevertheless, they are now deemed irrelevant.
Critics of BMI’s assessment point out, quite rightly, that forecasts are not infallible; policy actions post-election sometimes do not correspond to the campaign rhetoric, and so it is entirely possible, even likely, that Poe or Duterte will defy some expectations, for good or ill. What focusing on the merits of BMI’s argument misses, however, is the reality that it doesn’t matter so much whether the argument is correct or not, because the whole point of the report was to signal Fitch’s approach to assessing the country’s credit risk under a new administration—if Poe wins, Fitch’s current assessment won’t change much; if Duterte wins, the country’s rating might be downgraded, and in any case, any subsequent review on the part of the ratings agency will be made from a negative perspective. If the new president—whoever he or she is—pursues a markedly different policy course than expected, the risk assessment will of course change, but that comes later, perhaps six months or a year down the road; initially, the new administration will either be given the benefit of the doubt or be shadowed by a cloud of skepticism—and all based solely on who wins the election.
Whatever Fitch’s response to the outcome of the election next week, the other major ratings agencies will probably follow suit; the big three agencies usually differ on some details, but almost never completely contradict each other. That could have a substantial impact on not only government securities, but also the stock market, foreign exchange, and bank interest rates.
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A necessary but enlightening correction was brought to my attention a couple of days ago in regard to my last column (“BMI’s brave leap into PH election politics,” May 3) by Peter Hoflich, who is the senior manager of Communications for BMI Research in Asia.
In that column, I made the assumption that Fitch Ratings, which owns BMI, uses BMI’s research in its credit risk assessment work—why else would Fitch acquire a top-flight economic research firm?—but that is not necessarily the case.
As Mr. Hoflich explained, “I did notice that you also mentioned Fitch’s own reports a lot in the article—while it’s true that we’re a recently-acquired unit of Fitch, I need to explain that our research is actually completely separate from Fitch’s because we are run completely independently. Our offices are separate, as are our methodologies, mandates, databases and client bases. So our analysis and views in no way represent Fitch’s analysis and views.”