S&P: PH rating upgrade unlikely amid killings

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Debt watcher affirms the country’s above-minimum grade of BBB

Standard and Poor’s (S&P) Global Ratings affirmed the Philippines’ investment grade rating on the back of the country’s strong external position. But the Duterte regime’s bloody war on drug crimes is threatening the economy and the country’s investment rating, the debt watcher warned.

In a statement Wednesday, S&P said it affirmed the government’s “BBB” long-term and “A-2” short-term sovereign credit ratings with a “stable” outlook. The sovereign rating of BBB is a notch higher than the minimum score for an investment grade. A stable outlook indicates that the rating is likely to stay the same over the short-term of 12 to 18 months in the absence of significant risks to the country’s creditworthiness.

“The ratings on the Philippines reflect our assessment of its lower middle-income economy and rising uncertainties surrounding the stability, predictability, and accountability of its new government,” it said.

The agency said President Rodrigo Duterte’s strong focus on improving “law and order” has allegedly resulted in numerous instances of extrajudicial killings since he came to power.

S&P said it believes this could undermine respect for the rule of law and human rights, through the direct
challenges it presents to the legitimacy of the judiciary, media, and other democratic institutions.

“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,” it said.

S&P said it believes the rising pressure on the Philippines’ institutional and governance settings has the
potential to hamper the ability to develop and implement swift policy responses.
“A higher rating is unlikely over our two-year ratings horizon.”

The agency noted it may raise the ratings if continued fiscal improvements under the new administration boost investment and economic growth prospects, or if improvements in the policy environment lead to a better assessment of institutional and governance effectiveness.

It may lower the ratings if, under the new administration, the reform agenda stalls or if there is a reversal of the recent gains in the Philippines’ fiscal or external positions.

The central bank said “structural and sound policy reforms” implemented by the past administrations helped the Philippines keep its investment grade rating.

“The Philippines’ ability to keep its credit rating well within the investment grade scale, which has transcended change in political leadership, is a testament that the country’s economic gains have been built from deeply rooted structural and sound policy reforms over the years,” Bangko Sentral ng Pilipinas Governor Amando Tetangco Jr. said.

Meanwhile, Finance Secretary Carlos Dominguez 3rd noted S&P’s decision to maintain the Philippines’ “BBB” rating and “stable” outlook as favorable news. “This certainly is good news as it affirms that the Duterte administration is on the right track in pursuing its 10-point socioeconomic agenda that aims to keep the Philippine economy on its high growth path,” he said in a separate statement.

“The continued investment-grade rating gives the new government greater resolve to transform the economy into a truly inclusive one by pursuing, among others, a tax reform plan that seeks to generate enough revenues to grow the middle class, energize the corporate sector, and raise investments in human capital and social protection to drastically reduce poverty incidence,” he added.

At the same time, Dominguez argued against the opinion of S&P that predictability of policymaking in the Philippines has “somewhat diminished.”

The finance chief said the administration’s economic pronouncements have been clear and consistent from the very beginning. He highlighted the fact that the Duterte administration’s 10-point socioeconomic agenda was announced even prior to the President’s formal inauguration and that the action plans to realize the agenda have already been operationalized.

“The Duterte administration is loud and clear in its message. We want to achieve a kind of economic growth that is not only robust and sustainable but one that actually lifts significantly more Filipinos out of poverty,” Dominguez said.

“If one is able to see through the noise created by negative headlines, he may have better and comprehensive understanding of the exciting, positive changes that are ahead of the Philippines,” he added.

External position
Offsetting these weaknesses is the Philippines’ strong external position – a rising foreign exchange reserves and low and declining external debt.

The credit watchdog said the current account is likely to remain in surplus, averaging 2 percent of gross domestic product (GDP) annually to 2019 and reflecting robust services exports – tourism, healthcare, maritime, and business process outsourcing.

“Competitive unit labor costs relative to peers’ (such as Thailand and Indonesia) and a large young, educated,
and flexible labor market imply further strength in services exports over the next five years,” according to S&P.
Participation in free trade agreements could provide further upside to the Philippines’ export earnings, it added.

S&P expects the Philippines to remain in a net external creditor position, demonstrated by its net external debt averaging about a 16 percent negative in 2016 to 2019, adding that external liquidity will also remain a sound 67 percent on average over the period.

“We do not envisage a marked deterioration in the Philippines’ external financing from a shift in foreign direct investments or portfolio equity investments, or from a reduction in disbursements from donors.”

Nevertheless, the debt watcher said other factors that mitigate risks associated with the Philippines’ international liabilities include a very low reliance on external savings by its bank and company sectors, as well as the low and mainly long-term nature of the government’s external borrowings.

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1 Comment

  1. Can somebody from Finance Department ask S&P how the big US Banks that collapsed like houses of cards in mere days during the 2008 Global Recession were able to get AAA ratings from the “Credit Rating” agencies including S&P?

    Get to know the reason and PH will surely get credit upgrade tomorrow.

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