LAPU-LAPU CITY, Cebu – The Philippines was among two countries that showed bright prospects in credit ratings amid a bleak outlook for the rest of the economies in the world.
Karby Leggett, Asia head of public sector at Standard Chartered, said the credit ratings of the Philippines as well as of Indonesia’s were seen to go higher.
“In both cases, the rationale for positive outlooks is the general improvement on the overall macro fundamentals, sufficient external buffers, and very high-quality policy-making,” he said in a press briefing during the Asean Finance Ministers’ Investor Seminar (AFMIS) in Lapu-Lapu City on Thursday.
Sovereign credit ratings, simply put, are indicators of the likelihood a country will pay back an obligation.
These also reflect how investors look at a government or sovereign environment in terms of suitability of business, said Leggett.
Many investors who would buy a government’s bond would look at the rating as it serves as a gauge on whether or not a government would pay or default on its obligation.
The Philippines was given the BBB stable long-term credit rating by Standard & Poor’s Financial Services (S&P) in 2015 while two others, Fitch Ratings and Moody’s Investor Service, gave the country BBB-Positive Investment Grade rating and Baa2 Stable Investment Grade rating, respectively, in the same year.
A BBB Stable credit rating for the country means the Philippines has an adequate capacity to pay its debts fully and on time. Stable, meanwhile, means the rating has a “stable” outlook and is likely not to change within a year.
Leggett said that because the rating is positive, there is one in three chances that the rating will go higher instead of lower.
At the end of the Global Financial Crisis in 2008 and the start of 2009, ratings have been on a declining trajectory, which was even more accelerated by the present European debt crisis.
Leggett said the decline can be attributed to growth and fiscal deficits as well as rise in public indebtedness.
Other issues seen to affect the opinion of credit rating agencies are the rising interest rates in the United States and soft commodity prices last year.
“The general outlook for 2017 is that there are likely to continue to be more credit downgrades,” said Leggett.
He said that the Asean region, particularly, is firm in the demographic window, given its huge number of working-age citizens and plenty of young skilled labor, which is a basis for very strong growth in the coming years.
However, he stressed that in order to enable population to find jobs, to produce and to consume, economies need to make the appropriate level of investment in infrastructure.
“You need road, electricity, bridges, transportation. The challenge here is to mobilize capital and make infrastructure investments,” said Leggett.
Economies such as the Philippines put out bonds to raise funds for infrastructure.
The Philippines’ Bureau of Treasury (BTr), in a statement, said it has raised P70 billion from its latest issuance of Retail Treasury Bonds (RTBs), which is now on its 19th tranche.
Leggett said sovereign credit ratings are critical in that bond investors require the rating in order to put their money in the bond market.
Some of the key strengths of the Philippines include fundamentally good external buffers such as robust foreign exchange reserves, making it one of the strongest Asian governments in the world.
The Philippines’ high growth rate has been sustained for many quarters and this suggests strong momentum in the economy.
“The economy is not only growing based on external factors, but there is internal demand, giving rating agencies confidence that the economy will continue to expand,” he said, adding that when there is expansion, there will also be job creation and business formation.
On the fiscal side, Leggett said the Philippine government has done a remarkable job in recent years in terms of managing deficit, keeping it at a range the rating agencies believe is “sound and stable.”
“Along with a sort of stable deficit, they have also brought down overall government debt to very strong levels,” he added
The outlook under the new administration was to continue that policy of bringing the debt levels down, creating a slight widening in the fiscal deficit of around 3 percent to accommodate greater infrastructure spending.
“The more infrastructure in place, the more growth you unlock, the more you can maintain that cycle of growth,” said Leggett.
But Leggett cautioned against the risks brought about by uncertainties in the global economy, such as the protectionist policies of US President Donald Trump as well as dollar concerns.
How the Duterte administration will execute its 10-point socioeconomic agenda as well as being able to mobilize infrastructure are seen to be crucial in buffering these factors.
Meanwhile, Leggett said there is tremendous appetite for sovereign bonds issued by Asean governments.
“There are far more investors who want to buy the bonds than there are bonds to sell,” he said, which he explained was an indication that there is an overwhelming confidence in the regional bloc.
This bodes well for governments looking to raise capital for infrastructure spending, he said.
While there may be political noise all over the world at present, including US President Trump’s policies as well as the issue on “Brexit” in Europe and how these will affect markets in other regions, Leggett said this does not deter investors.
“I think politics is always an aspect that investors look to, but it isn’t the most important factory by a pretty wide margin. Investors just want to know whether they will get paid once their bond is due,” he said.