OF SUBSTANCE AND SPIRIT

It was reported last Monday that securing an “A” sovereign credit rating by the end of the Marcos Jr Administration in 2028 “may be difficult as persistent underspending and the lack of reforms to improve revenue generation continue to constrain the Philippines’ growth prospects.”

These are valid observations.

Citing various economists like UP Los Baños’ Enrico P. Villanueva, Action for Economic Reforms’ Filomeno S. Sta. Ana III, and Ibon Foundation’s Sonny A. Africa, the report focused on the country’s public finance issues as a wild card, truly not without reason.

We know the drill, and all the points raised in the report are worth considering by those in authority. For instance, sustainable fiscal position implies the country’s ability to pay. Thus, if the Government simply managed to spend what was budgeted rather than deliberately restrained public expenditure in 2023, and pursued critical fiscal reforms without sacrificing growth, an “A” rating should be more attainable. We were set back. The report also cited that the Philippines’ macroeconomic indicators have little to show for a possible upgrade.
There could be more charity here because growth, while lower than 2022’s 7.6 percent and the six to seven percent target, was quite resilient. With inflation showing some downtrend with the labor market stabilizing, it was poor public finance that weakened whatever macroeconomic gains we have achieved so far.

Improving the country’s credit rating should include efforts to improve revenue collection, address smuggling, reduce corruption and ensure efficient spending consistent with the development plan. Additionally, bringing down the cost of doing business and focusing on such growth drivers as tourism and the creative industries could not be more urgent.
About four years ago, in July 2021, the discussion was equally interesting. Rappler picked up on the question of whether credit ratings could be eaten. Such a question arose because Fitch downgraded the country’s investment outlook to negative while retaining its investment grade status due to the pandemic’s economic scarring effects. Some quarters raised the importance of even discussing the issue of credit rating given the deep recession in 2020 and the loss of thousands of jobs.

ING Bank Manila’s Nicky Mapa, formerly one of our economists at the BSP’s Department of Economic Research, correctly responded to such a question.

“Yes, you can eat it, in the sense that it leads to lower borrowing costs, and the savings on that interest cost goes a long way and can be used for more productive needs.”
We were also cited based on one of our early columns here: “PNoy did his homework and delivered on his campaign promises on the economic front. Both the government and private firms proved that good credit ratings can be eaten. His bosses (meaning, the people) rejoiced.” I was referring to the upgrades between 2010-2016.

Fitch argued that while several buffers fortified the Philippines against the pandemic, these buffers were eroded by lockdown. The medium-term growth prospects and the dynamics of public policy were undermined. Regina Capital’s Luis Limlingan stressed that with the imperatives of the pandemic, the government might reverse policy reforms and court higher fiscal deficit and lower public credibility.

These are all valid observations because they are among those factors that credit rating agencies (CRAs) monitor in assessing sovereigns, both emerging and developed. Two years earlier, in May 2019, we joined then Finance Secretary Sonny Dominguez and then Treasurer Leah de Leon in announcing the April 30, 2019 Standard and Poors’ (S&P) highest upgrade of the Philippines—before and since then—to BBB+ and the formation of an inter-agency committee to pursue the road to “A.” During the press conference highlighting the presentation of Secretary Dominguez, we shared the key variables material to S&P’s credit rating process, something that we needed to focus on if we were to pursue the road to A.
First is institutional and governance effectiveness which weighs 25 percent. This should consist of quality and competence of bureaucracy, regulatory efficiency and control of corruption—all the components of public policy that impact on the ability to service debt obligations. Our latest scores in various aspects of governance compiled by different international bodies have mostly deteriorated.

Second is economic score which includes the country’s growth performance and prospects, as well as labor market stability. This is worth another 25 percent of the rating. With various downside risks to economic growth this year, it is quite difficult to be optimistic on this score.

With the same weight of 16.7 percent, external, fiscal and monetary scores complete S&P’s general scoring. External score includes the current account position, exchange rate, foreign exchange reserves and external debt. Fiscal score includes all the discussions then and now on government finance—budget, public revenues, and accumulation of public debt. In short, it is fiscal overhang and debt accumulation that could compromise the country’s credit worthiness. Finally, the BSP’s management of inflation, domestic credit and liquidity are the key components of the monetary score. With upside risks to inflation remaining dominant, we might fail to meet this year’s two to four percent target.
Come to think of it, credit rating prospects may also be suggested by the headlines last Monday in another business broadsheet: “BSP sees 3.4-4.2 percent inflation for March” which means inflation has not actually been tamed; “Manufacturing activity further slows in March” which is not growth-positive; “February budget gap widens” which is a no-no in public finance; and “PHL Jan. debt service up threefold to P159 billion” which is bad for debt sustainability.

We may not be able to eat an “A” credit rating literally but its attendant benefits like tighter debt spreads and additionality of foreign investments can translate into higher public savings, better infrastructure, more jobs, stable prices and higher market confidence.