THE economy is almost always the primary focus of the Philippines’ collective attention no matter what the circumstances, and it is particularly so now that there is a growing sense that the country’s economy is weakening. As one stark example of economic news feeding that sentiment, the Philippine peso fell to a 12-year low against the US dollar on Thursday, sinking to P53.51 to $1 and maintaining the reputation it has earned of being the “worst performing” currency in Asia this year.
Headline concerns such as the weak peso, elevated inflation, decreases in foreign investment and the country’s current account deficit are certainly not insignificant. There is a tendency, however, to view these conditions in a way that makes them seem worse than they might actually be, as executives from global ratings agency Moody’s Investor Services explained to the media on Thursday.
The main business of Moody’s, like its counterparts Fitch Ratings and Standard & Poor’s, is making risk assessments, specifically assessments of any likelihood that an entity such as a government, corporation, bank, or even a financial instrument like a bond will be able to meet its debt obligations over a period of time. That assessment, expressed as a credit rating, is a reasonable general indicator of the health of the economy when applied to the whole country.
Moody’s has given the Philippines a low “investment grade” rating of Baa2 with a stable outlook, which, while not a ringing endorsement of the economy, at least indicates the country should be considered reasonably sound and secure for investments.
The ratings agency does not, however, base this assessment entirely on economic indicators alone, but in part on how those indicators compare with the Philippines’ peers. Moody’s places the Philippines in a group designated as “developing APAC,” which includes, among others, its Asean neighbors Indonesia, Vietnam, Thailand and Cambodia, as well as countries like India and Pakistan.
The purpose of making these comparisons while making a conclusion about the country’s credit risk and worthiness is to add important context to individual indicators.
The “weak” peso serves as a good example. The fact that the peso has depreciated against the dollar and other currencies is by itself a credit risk. A lower peso effectively makes the Philippines’ foreign debt more expensive, and, thus, makes meeting existing foreign debt obligations and taking on new ones more difficult for the government.
By comparing how the Philippines is managing its depreciating currency with the way a similar country is managing the same problem, however, Moody’s can qualify how serious that difficulty might be. In this case, the lower peso is not seen as a serious problem at all, because the BSP has not sacrificed its foreign reserves (as other countries have done, such as Indonesia) to prop up the peso, holding onto the resources to meet other needs. Therefore, for a potential creditor considering a choice of whether to invest in debt securities from the Philippines or one of its close competitors, the Philippines has an advantage by virtue of being better managed.
As the Moody’s briefing revealed, in a whole host of indicators the Philippines presents a positive image in spite of the discomfort that is perceived here. Contributing factors such as higher oil prices, US interest rates and uncertainty over US trade tensions with the rest of the world present the same challenges to every one of the Philippines’ peers. But in general, the way this country has handled them through implementing tax reform and judiciously managing interest rates and foreign currency reserves has led to better results.
This image of relative stability matters to the country’s efforts to attract investment for its ambitious development goals, and should be regarded as a sign that despite conditions that feel worrisome, our policymakers are managing the economy about as well as can be under the circumstances.