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April 03, 2013

Philippines Hopes Better Credit Rating Will Draw Investors

by Simone Orendain

The Philippines has shrugged off decades of financial woes to earn its first investment-grade credit rating from one of the world’s leading ratings agencies. Fitch Ratings cites the Aquino administration’s improved money management, pro-growth policies and plans to increase revenues through a new “sin tax.”

Economists say it was only a matter of time before the Philippines would be given an investment-grade rating.  They point to the stock market, which has consistently reached record levels for more than half a year, and the solid yield on treasury notes backed by flush reserves.

Being one notch short of investment grade means a country’s bonds are “junk” or that the country that issues the bonds has a stronger chance of having to pay higher interest and defaulting.

Citigroup Philippine Economist Jun Trinidad said, now that the “junk” status is behind it, international investors will come around to the Philippines.

“That constraint, that institutional rigidity is gone now," noted Trinidad. "So that’s more financial benefits expected to come.”

Trinidad was referring to attracting big institutional investors to its stock market, such as pension funds and large mutual funds.

Royal Bank of Scotland’s Southeast Asia Senior Economist Enrico Tanuwidjaja said the investment grade rating is an overall endorsement of government policy.

“The market, in general, has acknowledged the improving fiscal, external position and then strong focus on the investment spending, governance and increasing tax revenue," Tanuwidjaja said. "Everything seems to chug along quite nicely.

Since he took office three years ago, President Benigno Aquino has been pushing major infrastructure projects that would entail partnerships between the public and private sector - with the hope of attracting foreign investment.

Twenty-five projects include light rail upgrades, school construction and new airports.  But the foreign chambers of commerce have grumbled about the slow pace of getting the projects up and running.  So far, one has broken ground, another is in the first phase and eight are in the bidding stages.

Ratings agencies claim that favorable ratings can help increase foreign direct investments for such projects, but economics professor and former budget secretary Benjamin Diokno disagrees.

“Foreign direct investment is governed by another dynamics.  It does not respond simply because you get investment grade," Diokno explained. "FDI’s would be sensitive to issues like, ‘Is the government policy consistent?’”

Diokno says companies want less red tape and less restriction on foreign ownership of businesses.

Although he says investment grade will make it easier for the Philippines to borrow money from foreign sources, there is no need right now, because the government holds more than $83 billion in foreign reserves.

“So we’re very comfortable.  We have large reserves.  It’s more than enough," Diokno said.

The investment upgrade could have some downsides. Diokno said if more money comes in, the Philippine peso will appreciate further, straining export businesses, and foreign remittances - which account for about 10 percent of the economy.

According to Enrico Tanuwidjaja, the Central Bank of the Philippines has taken some measures to keep the peso from appreciating too much and is trying to stave off large-volume short-term investment.

Tanuwidjaja expects the two other credit agencies to give the country investment grade ratings.  He said once that happens, the central bank will need to have strong monetary policy in place to handle the potential glut of capital.