A sovereign ratings upgrade by any measure is good news. And this is exactly how the Philippine government celebrated the successive announcements by the world’s Big 3 credit rating firms – Standard and Poor’s, Moody’s, and Fitch Ratings.
In November 2010, Standard and Poor's announced that it had raised the Philippines' sovereign credit rating by a notch to "BB." For the new government, the U.S.-based agency was the first of the Big 3 to do so, and the news was met with some degree of enthusiasm.
This month, about just a month away from the big date when P-Noy delivers his second State of the Nation Address marking one year of his leadership, Moody’s and Fitch in succession came out with their own verdicts.
Moody’s Investor Service upgraded the country’s sovereign ratings by a notch to Ba2 while pegging the outlook for the country’s foreign and local currency long-term bond ratings at “stable.”
Fitch, on the other hand, upgraded the country’s credit rating to just a notch below investment grade, and the credit rating on its long-term foreign obligations at BB+, definitely an improvement from the previous BB.
In its sovereign rating upgrade, S&P zeroed in on the country's improving growth prospects and ability to resist global shocks, citing the Philippines’ steadily improving external liquidity profile and the underlying strengths of its external accounts.
S&P also raised the Philippines' long-term rating on foreign currency senior unsecured debt to "BB" from "BB-" even as this rating is still two levels below investment grade. The agency likewise affirmed the country’s "BB+" long-term local currency rating.
Moody’s, on the other hand, attributed the higher rating to a “notable turnaround in fiscal management” by the government, particularly signs of improved revenue collections.
It also referred to the continued prudence of the current government in macroeconomic management, the solid growth momentum of the Philippines that has not produced substantial overheating pressures and has kept inflation rates steady.
Fitch has noted the continuing fiscal consolidation of the government while maintaining macro stability. It also said that the Philippines is on track to meeting its medium-term fiscal development goals after revenue collections grew 18 percent in the first four months of 2011 compared to the same period a year ago.
In particular, Fitch noted that the budget deficit for 2011 would stand at 3 percent of the country’s gross domestic product, an improvement from the 3.7 percent registered last year. On the other hand, debt levels at 57 percent of its GDP in end-2009 could decline significantly to 50 percent by end-2013.
Should revenue collection growth continue in the next months, the county would be in a good position to reduce its overall debts over the medium term, the credit ratings agency added.
What all the three rating agencies have said are also positive, good remarks about how the country is faring – but not good enough, it seems, from comments subsequently made by the finance secretary himself.
Cesar Purisima is grateful for the improved grading that recognizes the improvements that government has initiated to strengthen its fiscal position. But he could not restrain himself from expressing his belief that the country deserved a higher credit rating because of its strong balance-of-payments surplus and the almost four years of consecutive quarter economic growth.
His disappointment is understandable if viewed in context of current difficulties being encountered by government in looking for investors to finance an ambitious infrastructure program using a public-private partnerships vehicle.
With all the three ratings still at below-investment levels, this only means that the Philippines will have to compete with many other countries in the region that are equally as hungry for foreign funds to finance their respective projects.
From the point of view of the ratings agencies, there is still so much that needs to be done for the Philippines to graduate to an investment grade level. Besides, moving from non-investment to investment grade is one of the toughest leaps that countries – or even companies – have to face.
S&P cites the prevailing high public and external debt burden and the ongoing fiscal weaknesses, both of which will take time to resolve. A narrow revenue base and high incidence of tax evasion have contributed to weak public finances.
These weaknesses, according to S&P, remain constraining factors on the sovereign rating, and despite current measures to boost collection efficiency, a structural transformation of the revenue base will need to be put in place to strengthen the governance financial framework.
Moody’s also expressed reservation in the continued uncertainty of the government to implement structural measures to improve revenue generation. It also noted the still high public and external debt levels.
Purisima, on his part, has vowed to stay within the deficit target of P325 billion this year through a combination of expenditure discipline and aggressive implementation of revenue enhancement measures that will push for more reforms to promote fiscal sustainability.
The newly confirmed finance secretary also said there will be no let up in the campaign to prosecute, convict and jail tax evaders and smugglers as well as in the task of finding financing for key infrastructure projects.
All of the above, however, would need the unequivocal support from P-Noy. The President must be seen as articulating and actively pushing for the improvement of the fiscal position of his government. And the best time to make this pronouncement is during his State of the Nation address when Congress resumes session next month.
There is so much at stake should P-Noy’s government slacken even a fraction in its commitment to reforming its still weak fiscal position. S&P has warned that any sharp increase in debt or a significant deterioration in the external liquidity position could be basis for lowering ratings.
Time to be home and act, Sir P-Noy!
