OF SUBSTANCE AND SPIRIT
(Part I)
Credit rating agencies (CRAs) are usually behind the curve. From the time of their on-site assessment and actual rating action, significant events such as market-moving policy reforms could come out of the legislative mill. Thus, the assigned sovereign downgrade, upgrade, alphanumeric rating or adjusted outlook—positive, negative or stable—may not capture these policy changes and their likely consequences.
Alphanumeric upgrades, say a triple B+ to an A- rating with a positive outlook are better. CRAs consider that macroeconomic developments continue to evolve positively with a momentum for further gains that is almost unstoppable as indicated by a positive outlook. In 12-18 months, it is probable the sovereign will get a second look for another possible upgrade.
Credit ratings are important to sovereigns, corporates and banks. They are parameters used by the market in pricing their borrowings. For all of them, 10-20 basis points could translate into hundreds of thousands or millions of dollars saved. External borrowings become more cost-effective in financing infrastructure and social development projects.A BBB+ or an A- credit rating is just a symbol, yet it is a symbol that could fund growth and more jobs.
Of the three major CRAs, the Philippines enjoys the highest rating from S&P of BBB+ with a stable outlook. This is a notch away from A-. Moody’s assigns the country a Baa2 which is equivalent to Fitch’s BBB, both with stable outlook.
Of the three, Fitch was most conservative about the Philippines. When we were still at BSP, we handled monetary policy and investor relations for many years. We recall a Fitch analyst who argued that the Philippines should remain a junk sovereign despite our presentation replicating their methodology, showing the Philippines was underrated by 2-3 notches.
That was around 2010. At the time, we were rated BB by both S&P and Fitch, and Ba3 by Moody’s—all junk categories.
For the record, the Philippines had been doing its homework conscientiously, passing key policy and structural reforms, sustaining a dozen years of uninterrupted economic growth even through the Global Financial Crisis of 2008-2010. Historical bias prevented the CRAs from reflecting a decade of growth and reforms on their credit assessments.
But the Philippines soldiered on. We put out our message of growth and reforms across various communication platforms whether in the IFI, in investor fora and to the CRAs themselves. We managed to obtain an upgrade to the next higher alphanumeric rating, first from S&P from BB- to BB on November 12, 2010; Moody’s from Ba3 to Ba2 on June 15, 2011; and Fitch from BB to BB+ on June 23, 2011. While these were still junk ratings, they were a step up. In the next ten years, we graduated to become an investment-grade sovereign.
From the CRAs’ surveillance and standpoints, what are the tipping points in our sustained growth and market confidence in this time of COVID-19? What risks should be managed?
In a Webinar last week, Fitch consulted with a senior credit analyst in the market and with three of its key officers in the Asia Pacific groups doing sovereigns, banks and corporates to check on the dynamics of the Philippine economy today.
Noting the deep recession of 9.0 percent in the first half of 2020, Fitch projected some modest recovery in the second semester for a whole-year economic performance of -8.0 percent. Despite this decline, Fitch expected that with adequate FX reserves and reasonable external debt service, the external pressures are so far contained. While public finance has been observed to have weakened, there is still room for some fiscal accommodation at an existing rating of BBB. General government debt to GDP ratio remains below the BBB median.
Good.
But Fitch also raised three issues of great concern that could tip the balance to a possible downgrade. One is a possible departure from the existing policy framework. Two is a possible deterioration in external indicators. The third is a possible slippage in banks’ asset quality.
So far, the Philippines has avoided inclusion among the 36 sovereigns downgraded during the pandemic, and among the 44 sovereigns whose outlooks were also rated down to negative. Fitch kept its BBB rating of the Philippines but downgraded its outlook, from positive to stable between February 11 and May 7 this year.
What is keeping Fitch’s confidence in the Philippines’ macroeconomic future is its macroeconomic past.
The Philippines is credited with two decades of excellent growth and inflation record. We can also cite our resilient banking system, the great turnaround in public finance and our strong external buffers. We also have a manageable current account position, stable peso, robust FX reserves and declining external debt burden. During the webinar, Fitch was prepared to give the Philippines the benefit of the doubt in ascertaining its future growth path. Since our past is quite exemplary, the future has some good prospects to see that what was wreaked by the corona virus could be restored. (To be continued)