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CONTRARY to what many in government have been saying,
the country’s recent gains in reining in its budget deficit have
yet to translate to economic dividends, if we are to believe
Moody’s Investors Service.
In its latest annual report on
the Philippines, Moody’s explained at length why it withheld its
vote of confidence on the government’s recent fiscal performance.
The credit-rating company’s
decision went against Philippine officials’ expectation of an
improvement in the country’s rating outlook to positive. Instead,
Moody’s, much like Standard & Poor’s Ratings Services
earlier, maintained its stable outlook, which means that the country
would continue to bear the burden of a junk or below
investment-grade credit standing for the next six to 12 months.
The burden comes via costlier
borrowing, which the taxpayer—all of us—would have to bear in
terms of higher taxes, poor public service, or both.
Moody’s said that the
government’s success in keeping its budget deficit below ceiling
last year, while noteworthy, was insufficient to keep up
improvements in the fiscal sector over the long run.
This, it said, can be seen from
the government’s difficulty in raising ample funds for its
priority infrastructure projects. We may recall that the country’s
economic managers just came from a road show in Japan, where they
managed to convince foreign investors to pool a fund from where the
government can draw funds to finance its priority projects.
Unfortunately, the fund pool is
not exclusive for Philippine use—something our economic managers
would prefer to mention as an aside.
A government or company usually
undertakes a road show preparatory to borrowing other people’s
money. The objective is to raise enough interest for investors to
vote with their wallets and buy either the issuer’s new shares or
debt papers.
In the case of their recent trip
to Japan, Philippine officials said it was a nondeal road show aimed
only at explaining to the investor community the government’s
recent accomplishments. In other words, it was a junket.
That the country’s economic
managers should return home with only commitments to invest in a
fund pool meant not just for the Philippines says a lot about how
people outside our borders regard our fiscal performance to date.
This is not meant to denigrate
the achievements of the country’s economic managers. But as
Moody’s said, the country’s current credit rating reflects its
heavy debt burden relative to its peers. This burden leaves the
country susceptible to financial shocks, similar to the Asian crisis
of a decade ago, which closed down numerous businesses and rendered
many Filipinos jobless.
Unfortunately, Moody’s
statements, like those of Standard & Poor’s and one other
major rating firm, are holy words for the international financial
community. The government’s failure to meet tax collection goals
in the first quarter only confirms these rating firms’
beliefs—that the Philippines is clearly not yet out of the woods.
So why are foreigners flooding
the country with their precious dollars and lapping up local stocks
and other peso-denominated assets?
A big part of the explanation is
the unfailing remittances of Filipinos working abroad. If not for
the money they send home, their loved ones wouldn’t have enough
funds to buy the latest mobile phones, houses and lots, cars and
many other consumer items.
The resilience of the domestic
economy is due to strong consumer spending, which remains the main
engine of the country’s growth. Foreigners know that, which is why
they have been investing in shares of stock of banks that handle
those remittances, of property developers, of telecom companies, of
consumer firms, among others.
Add to that the strong
peso—again thanks to the greenback sent home by Filipinos abroad.
With an appreciating local currency, foreigners can buy and
repatriate more dollars from their peso investments.
What’s more, the strong peso
has slowed down inflation, which results in greater buying power
from every peso earned. With low inflation comes easing interest
rates, which in turn spurs more borrowing that can be used for
investment in the stock market, or more productive ends.
In short, we could be enjoying
more if the government’s fiscal house were truly in order.
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