May 11, 2019
IN the wake of the sovereign credit rating upgrade obtained by the Philippines from S&P Global Ratings early last week, the Duterte administration announced the formation of an interagency committee to manage the country’s efforts to enhance further its investment grade.
The move to approach the management of the country’s credit rating position in a systematic way is a smart government decision. If carried out successfully, the effort will provide numerous benefits to the country, beyond upgrades to its credit status.
The Philippines’ new S&P rating of “BBB+,” with a “stable” outlook, is two notches above the minimum “investment grade” rating, and just a step away from the “A” level vested on the world’s stable economies, or those with strong capacity to meet their financial commitments despite some susceptibility to adverse changes in economic conditions. The Philippines has now moved up from the “BBB” level where it has stayed since May 2014.
The immediate benefit of a higher credit rating is that it makes the country’s debt less costly, that is, it lowers the interest rates the government has to pay on loans or on bonds. At the current rating level, the Philippines will save P3 billion in interest on commercial bonds alone between now and 2022, according to Treasurer Rosalia de Leon.
Lower interest payments give the government more flexibility in managing the economy. It gains a privilege to borrow more to fund programs and projects, or it can use the savings that result from lower debt servicing costs for other purposes.
Another benefit is that a higher credit rating expands the market for Philippine debt instruments. Many institutional investors, such as pension funds, set minimum credit limits for the types of bonds or Treasury bills they can purchase. Now that the Philippines’ rating is two steps above the minimum investment grade, it will be considered qualified by more potential investors.
These factors will become even more positive if the Philippines’ credit rating is raised into the “A” range. Although every administration has naturally aspired to elevate the country’s credit rating, until now there has been no organized approach to doing so.
The new interagency committee, which will be led by the Bangko Sentral ng Pilipinas (BSP), will focus on improving the main factors that are examined by ratings agencies in assessing the country’s creditworthiness. As BSP Deputy Governor Diwa Guinigundo explained, these factors include raising the country’s per capita income, increasing its output of goods and services, building up external payment buffers such as foreign currency reserves, maintaining stable consumer prices, improving public finance and enhancing governance standards.
All of these factors are, of course, fundamental aspects of the overall economy, things that the government needs to manage effectively, whether credit ratings are a concern or not. Putting them in the context of credit ratings, however, is a novel approach that may very well improve economic policy direction. The reason for this is that a target credit rating establishes specific benchmarks that define the country’s level of credit risk. For example, a rating of “A-” may require that per capita income be above a certain amount; different policy options can then be compared with that benchmark to select the most effective one.
Coming as it does amid some less-than-encouraging news about lower economic growth, such as the 5.6 percent rise achieved by our gross domestic product in the first quarter of this year, the widening of our trade deficit and the increase in government debt, the formation of the interagency committee is a welcome sign of renewed effort and focus on the economy.
We hope that the committee’s work will live up to the sharp thinking of the idea behind it.
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