LAST week, Standard & Poor’s Global Ratings issued a less than encouraging assessment of the Philippines’ sovereign credit rating status, saying that while there was no reason to reduce the country’s ‘BBB’ long-term rating and ‘stable’ outlook, there was little chance of an upgrade in the next two years.
President Rodrigo Duterte responded to the perceived criticism in his typically charming way, saying in effect that it matters not a whit to him what S&P or any other ratings agency thinks, he can always do business with Russia or China.
S&P’s concern, as they described it is that the violence of the anti-drug campaign, and implicitly, Duterte’s rough-hewn manner in approaching almost any issue, “When combined with the President’s policy pronouncements elsewhere on foreign policy and national security, we believe that the stability and predictability of policymaking has diminished somewhat,” and that “rising pressure on the Philippines’ institutional and governance settings has the potential to hamper the ability to develop and implement swift policy responses.”
At some point Duterte’s ill-tempered curmudgeon act is going to lose its appeal and start to have consequences with tangible costs. The country’s credit rating may be one of those costs, which was exactly what S&P was trying to point out.
In a sense, the attention Duterte attracts has already had consequences; thanks to the country’s strong growth and the impact he has made on the world stage with his ‘colorful’ style, the Philippines has made the list of key countries for whom the major ratings agencies, S&P among them, issues credit ratings advice as a public service. This is in contrast to the Aquino era, in which a president starving for positive reinforcement had the government seeking sovereign ratings reviews roughly every nine weeks on average—and paying anywhere from $250,000 to $1.5 million for each one. If that was still the case, Duterte could basically ignore the ratings agencies, but the Philippines has become interesting enough that they will periodically issues ratings advice whether he likes or not.
And whether he likes it or not, that ratings advice has a big impact on the government’s ability to fund its activities. Neither China nor Russia, separately or combined, will make up for the flow of debt investment in government securities from the rest of the world (mainly the US, Japan, and Europe) any time soon. And it is that investment which makes it possible for the government to function, because it is fairly reliable, and smoothes over the seasonal effects of domestic tax collection.
To Duterte’s credit, apart from the anti-drug campaign—which is not quite the black-and-white situation the rest of the world tends to see it as—he has not made actual policy decisions that are as ‘colorful’ as what comes out of his mouth; he inherited relative economic stability and a sound debt profile for the country, and has been careful so far not to upset that. At this point, it seems reasonably likely that will continue to be the case, at least in the near-term, but he has introduced an element of unpredictability that is hard for an entity like a ratings agency to ignore.
A sovereign credit rating is a qualitative assessment of the risk that a country will not be able to pay its debts when due. Ordinarily, that assessment has very little to do with social or political policy, and focuses on practical financial attributes such as the country’s income, how well it can control its banks and monetary policy, its financial reserves, and its track record in meeting debt obligations. A favorable assessment and corresponding rating means that it is able to incur more debt at a lower cost; interest rates on bonds and other government securities will be lower, and the volume of debt it can incur can be much larger.
One direct effect of credit ratings is that they attract a progressively larger pool of investors the higher the ratings are; many investment funds, particularly public funds (investments by government pension systems, for example) have a ratings threshold, below which they will not invest. Thus, if the rating is lowered, the pool of potential investors shrinks, and the government will, in all likelihood, have to offer higher interest on debt instruments to those who are left.
S&P’s assessment is that there is now a chance—higher than it was before Duterte took office, but not high enough (yet) to affect the present rating—that there will be policy changes in the areas that directly affect the country’s ability to meet its debt obligations. Similarly, S&P is also slightly more concerned before that policy in other areas may reduce inflows of investments or domestic spending, which in turn will affect government revenues and debt management ability. In particular, although S&P related this is a very measured way, there is some indication that the distractions of the anti-drug campaign and political affairs have slowed the administration’s deployment of its economic agenda, and hinder its ability to quickly adjust policy to unexpected external factors—for example, a significant shift in trade or immigration policy after the US election—that could have a negative impact on the Philippine economy.
Duterte can squawk all he wants, but he has no basis for assuming observers here or abroad will simply still give him the benefit of the doubt as his “honeymoon period” nears its end. S&P’s ratings advice was not quite a condemnation, but more a diplomatic caution to him and his administration to pay attention to its economic priorities, and not let the reasonably good circumstances the country enjoys now deteriorate. As long as Duterte realizes that there are people who are paying more attention to what he does than what he says—and to be fair, so far it seems he does—then the country should remain in fairly good shape with respect to its economic relationship with the rest of the world.