LAST week, the Aquino Administration received what it considered a piece of bad news when Fitch Ratings, one of the big three credit ratings agencies, announced that it was keeping its BBB- sovereign rating for the Philippines but raising its outlook on the country from “stable” to “positive.”
A BBB-, which the global rating agency has maintained for the Philippines since March 2013, is the lowest investment-grade rating in Fitch’s scale; a “positive” outlook indicates the likelihood that, provided the country’s current credit profile does not change significantly, the rating will be raised in the next 12 to 18 months.
Despite the boost in the country’s outlook – every other consequential credit agency still views the Philippines as “stable,” which means they do not expect their ratings to change in the next 12 months or so – the government was thoroughly disappointed that Fitch did not raise its rating, and detailed the Investor Relations Office of the BSP to sally forth to complain about it to the media.
In two key indicators of creditworthiness, general government debt as a percentage of GDP and credit default swap spreads on government bonds, the IRO said, the Philippines performs better than similar countries with higher ratings. Philippines’ CDS spreads are better than those of Colombia, Thailand and Mexico, for example, even though Fitch rates Colombia one notch higher at BBB, and Thailand and Mexico two notches higher at BBB+.
The IRO also pointed out that the Philippines has a lower debt burden than Colombia, Mexico, Panama, Spain and Italy, which are all rated higher; Panama is assigned a BBB rating by Fitch, the same as Colombia, while debt-ridden Spain and Italy, with debt-to-GDP ratios of 99.1 percent and 133.3 percent, respectively, are at BBB+.
Finance Secretary Cesar Purisima chimed in as well, saying, “President Aquino’s commitment to good governance is yet again affirmed,” presumably referring to the indicators cited by the IRO. “Nonetheless, we believe that we are still underrated by at least a notch [by Fitch].”
IRO Executive Director Editha Martin added, “A wide range of administrative and legislative measures implemented over the past six years will help institutionalize sound governance and economic policies over the long term,” implying, with the same conviction of a Christian missionary trying to convince an audience of Hindus that there is only one God, that Aquino’s good work is something that is otherwise universally recognized.
The comments from the government, however, conveniently only address one of the two simple considerations underlying the whole concept of credit ratings: How reliable is the country as a debtor, and how much debt can it afford? The ‘sound fundamentals’ highlighted by Purisima and the IRO are indicators of the country’s stability as a debtor, and indeed, that is an entirely positive factor; Philippine finances are suitably organized to allow it to meet its debt obligations, and they are managed well.
But how much debt the country can afford is another matter entirely, and where the Philippines significantly lags its better-rated peers. Since the IRO used indicators to make its point, I’ll share two different ones, using data from the World Bank and the UN Conference on Trade and Development (UNCTAD).
The Philippines’ GDP per capita, which is about the best indicator of national productivity or earning power, was just $1,649 at the end of 2014; in Thailand, it was $3,451; Colombia, $4,549; Panama, $8,087; Mexico, $8,626; Spain, $25,618; and in Italy, $28,484.
FDI is also a good indicator of the country’s earning power, and in this respect, the Philippines, which drew in $6.2 billion in foreign direct investments in 2014, is a little ahead of tiny Panama at $4.7 billion – which has precisely one thing going for it, the canal – but trails Italy’s $11.5 billion, Thailand’s $12.6 billion, Colombia $16.1 billion, and the approximately $22.8 billion each gathered by Mexico and Spain.
In gross terms, what the Philippines’ credit rating is saying is, yes, the country is very likely to pay back a loan in good order, but has limited income or equity and, therefore, is limited in how large a debt it can take on – good enough to make Philippine investment grade, but only just. If anything, Fitch’s positively adjusted outlook should be considered the stamp of approval the government was looking for, if they really believe their own press about setting the country up for long-term fiscal stability.
Fitch, which has always seemed a little kinder to the Philippines in its ratings reviews and other assessments than the other credit agencies, is the only one who sees things improving in the near future. That is a fairly strong vote of confidence, because it assumes the improvement will be on the income side, given that the fiscal management environment is already deemed sound.
Of course, the government was obviously hoping for something a little less sublime, but the Fitch rating is probably reasonably accurate; according to the Trading Economics (TE) model (which is entirely quantitative, unlike ‘real’ ratings, which rely on a significant amount of judgment), the Fitch rating and outlook is rather optimistic. TE gives the Philippines a score of 54 out of 100 —on the borderline between junk and investment grade.