Last Wednesday, the market hit a record high of 6,847.47 as the country was accorded for the first time an investment grade rating.
The score was given by the Fitch Rating Group, one of the three “Nationally Recognized Statistical Rating Organizations (NRSRO) by the US Securities and Exchange Commission in 1975” that give opinions and scores relating to credit ratings, including financial or operational strength of countries and financial entities. The two other NRSROs are Moody’s Investors Service and Standard & Poor’s Inc.
Fitch gave the Philippines a score of “BBB-” for its Long-Term Foreign Currency Issuer Default Rating (IDR) from “BB+” and “BBB” from “BBB-” for its Long-Term Local Currency IDR. Fitch stated further that the “outlooks on both ratings are stable.”
Likewise, Fitch upgraded the country’s “ceiling” to “BBB” from “BBB-” with the “Short-Term Foreign Currency IDR to “F3” from “B.”
The rating scales are used to measure the “relative ability of a country or entity to meet its foreign financial commitments such as interest, preferred dividends, repayment of principal, insurance claims or counter party obligations.”
Fitch credit ratings cover “corporate, sovereign (including supranational and sub-national), financial, bank, insurance, municipal and other public finance entities and the securities or other obligations they issue, as well as structured finance securities backed by receivables or other financial assets.”
As applied in the recent Philippine rating upgrade, the rating scales pertained to the assessment of a country’s ability to meet its foreign currency or local currency commitments.
The scales or scores used are drawn from “globally applicable” or “internationally comparable assessments.”
As such, the scales used are recalibrated from time to time in order to “reflect changes of the times and maintain their comparability with other international credit ratings.”
Withstanding all the norms observed to make the rating scales as effective and applicable, they are but considered “opinions only.”
Long-term credit ratings are assigned on an alphabetic scale from “AAA” to “D.” The later “was introduced in 1924 and later adopted and licensed by S&P.”
Fitch, like S&P also “uses intermediate +/- modifiers for each category between “AA” and “CCC.” For example, “AA” is sometimes modified into “AA+,” “A,” or “AA-;” “A” into “A+” or “A-.”
Investment grade ratings used for long-term credits are as follow: “AAA, the best quality entities/companies, reliable and stable; AA, quality entities/companies, a bit higher risk than AAA; A, economic situation can affect finance; BBB, medium class entities/companies, which are satisfactory at the moment.”
For non-investment grade ratings, they are: “BB, more prone to changes in the economy; B, financial situation varies noticeably; CCC, currently vulnerable and dependent on favorable economic conditions to meet its commitments; CC, highly vulnerable, perhaps in bankruptcy or in arrears but still continuing to pay out on obligations; D, has defaulted on obligations and Fitch believes it will default on most or all obligations; NR, not publicly rated.”
Short-term credit ratings are assigned (according to their potential of default within a 12-month period) as follow: “F+, best quality grade, indicating exceptionally strong capacity of obligor to meet its financial commitment; F1, best quality grade, indicating strong capacity of obligor to meet its financial commitment; F2, good quality grade with satisfactory capacity of obligor to meet its financial commitment; F3, fair quality grade with adequate capacity of obligor to meet its financial commitment but near term adverse conditions could impact the obligor’s commitments; B, of speculative nature and obligor has minimal capacity to meet its commitment and vulnerability to short term adverse changes in financial and economic conditions; C, possibility of default is high and the financial commitment of the obligor are dependent upon sustained, favorable business and economic conditions; D, the obligor is in default as it has failed on its financial commitments.”
In summary, ratings from “AAA” to “BBB” stand for investment grade while ratings from “BB” to “D” stand for speculative grades.
Bottom line spin
Fitch said it issued the upgrade because the external balance sheet of the Philippines had grown stronger even when compared to peers within the “A” range.
Also, it said the Philippines had posted “persistent current account surplus underpinned by remittance inflows” which helped it become a net external creditor.
Added to that, “the Philippines also experienced stronger and more stable economic growth than other BBB- countries over the past five years.”
In this connection, it anticipates that the country’s economic growth will continue to grow in the coming years by an average of 5 to 5.5 percent. This will render the “country an investment destination” as a result, it added.
More importantly, Fitch finds that the country’s improved economic condition has also rested largely on the current administration’s program of transparency and democratic rule.
The government pointed out the upgrade should lead to lower borrowing costs and attract capital inflows that would lead to more economic productivity and employment, two of its program goals.
Other quarters, however, are apprehensive that if not properly harnessed, they can also hamper economic growth. For instance, the large inflows of foreign money to the country has already driven up the value of the peso.
While the government says it is just a liquidity management issue, there is no denying that the peso’s continued rise has started to affect local productivity.
Reports say the peso strengthening has resulted in the the closure of a number of small call centers and business process outsourcing outfits. Because of their lack of size to achieve economies of scale, they have become uncompetitive due to the rise in the value of the peso.
The increased inflow of foreign money becomes like a double-edged sword when they are more “speculative” rather than “long-term.” Speculative foreign money do not contribute to real production, productivity and employment generation.