AT the annual World Bank-International Monetary Fund Group meeting in Washington, D.C. last week, Finance Secretary Carlos Dominguez 3rd told an audience of credit ratings agency representatives that securing higher credit ratings for the Philippines was only “a secondary concern” for the Duterte administration, the “first priority” being poverty reduction.
The administration has set an ambitious goal – and a welcome one – of reducing the Philippines’ poverty incidence of almost 26 percent now to 17 percent within the six-year term of President Rodrigo Duterte’s. The government intends to do this, Dominguez told the debt watchers, by accelerating spending on pro-poor and growth-friendly programs – including significantly increasing infrastructure spending – to make the Philippines’ sustained economic growth more inclusive.
All three major credit ratings agencies – Moody’s Investor Services, Standard & Poor’s (S&P), and Fitch Ratings – currently give the Philippines ratings that are at or just a step above the lowest investment grade. But all three have recently expressed some misgivings about the direction of the economy and the government’s debt position, thanks in large part to their perception of growing instability as a result of the drug-related killings in the country.
S&P, in fact, got under President Duterte’s skin with an assessment a few weeks ago that concluded possible political instability had raised the Philippines’ risk profile, and that the country’s economic and debt management trajectory over the next two years was unlikely to be impressive enough to justify a ratings upgrade. That analysis, which sounded less like criticism than it did a pointed reminder to the Duterte administration not to neglect its economic policy responsibilities, earned a tart response from the President that the ratings agencies were free to turn their attention elsewhere, and perhaps encouraged Finance Secretary Dominguez to address the matter of ratings directly in Washington.
While the government’s anti-poverty drive is admirable, we would have rather heard Dominguez give the country’s sovereign credit rating a bit more importance than to describe it as a “secondary” consideration.
It should not be more important than economic development to reduce poverty and spread the benefits of a growing economy, of course – but without a strong credit rating, the Duterte administration may find it more difficult to carry out its plans.
With higher credit ratings, the costs of additional debt incurred by the government to fund programs such as infrastructure development becomes lower, and more investors are available to invest in Philippine debt instruments such as government bonds. Even though the Duterte administration has said it will strive to tap the domestic market for debt funding, as Bank of the Philippine Islands (BPI) lead economist Emilio Neri Jr. pointed out during the 48th Finex National Conference on Friday, the government will need to spend some foreign currency for imports. It means that to avoid drawing down its foreign reserves too far, it is likely to issue some foreign currency-denominated debt instruments; in fact, it has already announced plans to do so.
While we do not want to see a return to the days of an administration bewitched by credit ratings upgrades as a measure of the country’s economic strength, we would also like to point out that credit ratings are valuable and important. Dominguez acknowledged to his listeners in Washington that the Philippines has worked hard to achieve stable economic fundamentals, and that the current administration appreciates that state of things. But it would have also been a welcome statement from the finance secretary if he had said that the Duterte government would continue to work to improve the country’s credit standing while it pursues its broader economic agenda. It is a perspective the administrationshould like to take as it looks toward the implementation of its first budget in a few months’ time.