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IT is easy to lose sight of the forest for the trees amid the
government’s jubilation over last Friday’s welcome news on the
fiscal front.
To be sure, Moody’s Investors Service’s
upgrade of the Philippines’ credit rating outlook to positive from
stable is no mean accomplishment. The government after all risked
popular disaffection when it pushed for the legislative passage of
new tax measures during the depths of its financial difficulties.
Those very same tax laws—all of which raised
much public uproar—helped the government narrow its budget deficit
and bring down its debt over the past five or so years—something
Moody’s acknowledged when it decided to raise its outlook on the
Philippines.
The upgrade means Moody’s is likely to lift
the country’s credit standing in the next six months to a year.
The upside here involves more than just a reputational gain.
Any improvement in the Philippines’ rating
would translate to lower borrowing costs not only for the
government, but also for private companies, whose credit standing
has been crimped by the ceiling the sovereign rating imposed on all
firms. After all, even the bluest-of-the-blue cannot attain a credit
rating that is higher than that of the country in which it is based.
This is why it is in the interest of the private
sector that the government mends its finances. Lower borrowing costs
for companies mean they can raise more money to invest in the
business or to reward their shareholders. Either way, companies
boost their economic prospects.
The same can be said of the government when it
trims its borrowing costs. It can raise more funds to spend on
infrastructure projects and social services for its citizens, who
are the state’s rightful shareholders. The country’s economic
prospects likewise are improved, as infrastructure projects build
capacity to expand, while social services represent a subsidy that
leaves more money in people’s hands to spend.
The potential economic windfall from an
improvement in the government’s fiscal position partly explains
the rise in the local stock market, as investors bet on rosier
corporate profits. Profitable firms are more likely to expand their
businesses and generate jobs than losing companies.
Rising employment in turn boosts household
incomes, which feed back to grow the economy through higher
purchases of goods and services.
Having said the above, we should put Moody’s
recent action in its proper perspective. Compared with Standard
& Poor’s Ratings Service and Fitch Ratings, Moody’s is
behind the two other global rating companies when it comes to its
assessment of the Philippines’ credit standing.
Moody’s rates the country four notches below
investment grade, while S&P and Fitch rate us three and two
notches, respectively, below the ideal. What this means is that any
actual rating upgrade that Moody’s would accord us—which is
usually one notch at a time—would still leave the Philippines in
the junk category.
A country with a junk or below-investment grade
rating is burdened with higher interest rates than another state
that enjoys investment status. In short, the government’s
jubilation over Moody’s gesture may be premature, as we’re not
yet out of the woods.
It would be easy to appreciate this point of
view if we recognize that the government’s recent fiscal success
is hardly something we can proudly call sustainable. By its own
admission, the government said that last year’s gains were largely
due to record proceeds from the sale of state assets, and not to
improvements in its tax collection efficiency.
Rating companies are only too aware that asset
sales are nothing but a stop-gap measure. The real challenge of
raising ample tax revenues remains an incomplete task.
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