• Do the latest credit ratings mean that things are going well?

    Mike Wootton

    Mike Wootton

    Well it’s certainly all happening. Accusations and counter accusations of mega-corruption and scandal all over the place, and lots of reportage about the detailed legal points on which the various charges are founded; Priority Development Assistance Fund, Disbursement Acceleration Program (DAP), Malampaya funds, etc., etc. The recent smuggling exposés and the Czech train business have been just buried and perhaps forgotten now under all the latest scandals.

    If only 1 percent of all this noise is factually correct, then there is clearly something badly wrong with the way in which the Philippines operates. What does not get a lot of air time is business and bank corruption, all the current scandals are in connection with government corruption. Have a look inside the can in which Philippines business operates and there will be more big fat worms than anybody can count.

    One thing that does seem fairly clear though is that there is a lot more money in [very limited]circulation than a casual observer may think when looking at the poverty and infrastructure. The gross domestic product per capita is, depending on whose numbers are used around, $2,600 from a total 2012 GDP of $257 billion. Most forecasts have GDP growth at about 7 percent or greater, and the credit-rating agencies are improving their rating of the Philippines at quite a fast rate to Moody’s now Baa3 “investment grade.” Interesting to note that the movement of over $2 billion funds in two years under the DAP was justified in order to accelerate sluggish economic growth.

    Obviously the credit-rating agencies bullish pronouncements “do not reflect the real economic situation of the Philippines,” as noted by the IBON Foundation. The Philippines ranks at no. 138 out of a total of 183 countries on the World Bank’s 2013 “Ease of Doing Business” survey, and at least 28 percent of the population are living below a very low poverty line. It brings to mind the Democratic Republic of the Congo where President Mobutu had a special airstrip constructed for the Concord to use, which he hired to take him on his shopping trips while the rest of the country starved, and where the 2012 GDP growth is forecast at 7.1 percent! The Congo is at position no. 181 on the Ease of Doing Business ranking. I am not seeking to compare the Philippines with the Democratic Republic of the Congo but am trying to make the point that GDP growth forecasts are not only to some degree adjustable depending on how you work them out, but are also not immutable indicators of economic development. They give some broad sort of directional idea but that is all.

    An important element in any investment decision is political risk, or the exposure of the investment to political instability, change of government and the likelihood of government not honoring its commitments or simply changing its mind. Political risk is often lower in authoritarian states where the investment is at the whim of whoever is the state’s governor. In the Congo for example, so long as you could develop and maintain a good relationship with President Mobutu you would be fairly well assured of gaining your planned investment returns. Of course, if he were to be overthrown in a coup, then the investment returns are at risk. Here in the “democratic” Philippines, there is political risk on a six-year cycle as each new administration comes in, and at a micro level in relation to specific projects, the cycle is only three years. For sure, each new political group will disown any commitments made by its predecessor group, and there is a need to educate and convince the new group all over again—which really makes things tiresome and uncertain. Now it seems, in addition to the usual cyclical uncertainty come additional concerns over the ability to sustain political support for an investment, when the means of obtaining and sustaining such support may have been bought rather than supported on objective grounds. In other words, if a democratic government enters into a commitment only thanks to having bought the support of a necessary majority of legislators and then the means to make further payments in order to keep such support are threatened or even withdrawn, then any investment made on that basis is subject to further high political risk.

    Given that there is so much political influence in any business in the Philippines and that often there is some subjective motive driving the political position on any particular matter, then what is the real level of political risk in today’s Philippines and consequently what should be the appetite of the international investing community for leaping into this latest “Asian Tiger” economy regardless of the views of the international credit-rating agencies? And additionally, I wonder if the views of the providers of Overseas Development Assistance have been modified by the latest exposés?

    Mike can be contacted at mawootton@gmail.com


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    1 Comment

    1. the reason imo why gov’t is the focus of the news and not bank/business corruption is bec. of the nature of fund ownership. After all, its our money that’s being misused, abused and misspent. Besides, who will tell on the banks and businesses. Here’s hoping those in the know could share some details.