Speed bumps on the Road to A

Published January 29, 2020, 12:00 AM

by manilabulletin_admin



Diwa C. Guinigundo
Diwa C. Guinigundo

In the 1970s and 1980s through the early 1990’s, our economic performance was dismal — evidenced by a “junk” credit rating.

Against this backdrop, the Philippines’ 20-year rise is phenomenal.

With great stories on robust growth, stable inflation, good public finance, and improved external anchors with strong policy support, our eight-year journey to investment grade is one for the books. It has been fast and furious.

For this reason, several economic analysts and commentators may be skeptical of the Road to A. More importantly, they see, as we do too, some speed bumps along the way.

Credit rating agencies’ (CRAs) assess both a jurisdiction’s ability to pay, and its willingness to pay its obligations.

Given our excellent macroeconomic performance on growth, inflation, debt and FX reserves management, and revenue mobilization, CRAs take no issue on our ability to pay. The Philippines now has a stronger ability to honor its credit obligations.

The second parameter  — sustainability of intent to pay — might be more challenging. There are three sub-parameters used to assess this:  first is history of debt default, and second, participation in international organizations and activities. These two tests, the Philippines could easily hurdle.

The third sub-parameter concerns legal enforcement of contracts. Admittedly, the whole process of assessment could be highly subjective.

But recent moves to renegotiate what have been described as “onerous contracts” with Metro Manila water service providers could make CRAs question the binding nature of contracts in the Philippines.

This will be a matter of opinion. Those who are affected cry foul because these are contracts perfected years ago. The government is raising the issue of whether these are conscionable.

The same cloud of doubt is cast by recent spirited tirades against big players in the broadcasting, airline, newspaper, real estate and telecommunications industries. While justified on several grounds, these have economic impact and are prone to be used against the republic.

A few days ago, Bloomberg reported the Philippine stock market falling “to its lowest since 2011 relative to peers” as attacks against big businesses were stepped up last month.  This drop was dramatically felt by equities of big businesses involved.

To ward off potential reservations of CRAs, government must consistently argue and prove that its actions remain consistent with the law, and that in the long run, there is promotion of mutually acceptable terms of business reference.

Looking at specific methodologies of CRAs—S&P, for example— one will see a general coverage of institutional, economic, monetary, external, and fiscal areas.

On the economic side, our consistently low GDP has always been a red flag for CRAs. While national output has steadily grown in the last 20 years, the population has also grown. The phenomenon could be a matter of arithmetic. But CRAs insist on expanding it to caustic proportions.

Arguing for the republic in the past, we had asserted that our GDP per capita actually masks the clear advantage of having a young population.  CRAs fail to appreciate this important dimension. If an aging population and its consequences on both the budget and the pension system are macro-negative, why can’t CRAs consider a young population as credit-positive?  It is actually indicative of a more sustainable growth path. GDP per capita has actually risen steadily. If gross national income is used instead—given the importance of income earned abroad—this metric will show a more favorable picture. We have shown to CRAS that countries with far higher real GDP per capita are now in fiscal and debt crises.

On the external position, the continued merchandise trade deficit fuels CRAs’ concern.  But this is easily explained. The economy is building infrastructure and capacity. Imports are bound to outstrip exports.   In the long run, there should be a correction and a reversal. Trade deficits have been incurred, but inflows from remittances, business process outsourcing, tourism, and foreign investments have mitigated this deficit. In fact, the overall balance of payments was in surplus in 2019.

On the monetary side, there is no issue. Inflation spiked in 2018 because of the considerable rise in oil and rice prices, and the dramatic depreciation of the peso. Oil supply and prices have since normalized.  The rice tariffication law has addressed the shortage in rice while producing duties for local farmers. The peso has stabilized. Given robust output growth, and the within-target actual and projected inflation, there is very little basis for tweaking monetary policy at this point. For the past two decades, inflation management has become a major feat of the Philippine economy.

While fiscal space clearly exists, there is need for more. Fiscal management has been excellent.  But the need for more fiscal resources has become even more acute on account of the “Build, Build, Build” program. The Philippines is significantly behind in both hard and soft infra. But will this be financeable? Congress should close ranks and immediately pass the rest of the captive components of the fiscal reform measures. With a big revenue shortfall, the only way to achieve higher capacity is to borrow more from both local and foreign investors who would buy Philippine bonds from the capital market. No to debt trap!

Fiscal consolidation is meaningless if the government just cuts back on public spending. Both revenues and spending must be raised to break through the lower middle-income barrier. There is no such thing as a free lunch.

Finally, on the institutional side. S&P would expect three things. The Philippines has to show a good long track record of improved governance through third-party assessment. This might be a difficult hurdle considering alleged corruption at many levels of government, and the manner of appointment and dismissal of public servants.

It is important to show a more institutionalized framework of good governance. While the Philippines has abundant laws on governance, observance is key. There must be successful policy coordination and fiscal management. In this regard, the Philippines can be proud of the effective coordination between fiscal and monetary policies through the Development Budget Coordination Committee. Outside this economic sphere, it is important to demonstrate that a constructive dynamics also exists.

What is next?

It is crucial for the Philippines to ensure that these speed bumps can be hurdled with ease. Policy reforms needed to further transform the economy are in the Medium-Term Development Plan. Our building blocks have been identified. Some have been put in place. Others have yet to be deployed. These reforms are being pursued to sustain meaningful economic transformation. This message should be consistently conveyed to the CRAs.

This is our journey on the Road to A. Even with speed bumps, if we all work together, we can assuage the worry conveyed in what my illustrious fraternity brother, Gary Olivar, warned about a couple of days ago. He grimly argued, “If it took over a century to create the mess we’re in, we may not be entitled to a quick fix shorter than that.”

No quick fixes, yes. But we have long started, and are on a determined journey nonetheless.