Investment grade still PH’s holy grail

Less than a decade ago, any hope of securing an investment grade rating for the Philippines from any of the international credit watchdogs was considered to be little more than wishful thinking.

With the government’s debt consistently rising after the 1997 Asian financial crisis—hitting a peak of 78 percent of gross domestic product (GDP) in 2004—the country could be said to be on a brink of a fiscal crisis.

But, things have gradually changed since then. Now, there is a sense of optimism that an investment grade for the Philippines is within reach.

This positive sentiment is shared both by the public and private sectors after the three major international credit rating agencies—Moody’s Investors Service, Standard & Poor’s, and Fitch Ratings—recently made favorable rating actions for the country.

In December 2011 and January this year, Moody’s and S&P, both of which had assigned a rating of two notches below investment grade for the Philippines, respectively lifted their outlook from “stable” to “positive.”

A “positive” outlook indicates a high probability of an upgrade in the credit rating of an economy within the short term.

In June last year, Fitch also raised the country’s credit rating to just a notch below investment grade.

“We can get another credit rating upgrade sooner rather than later,” Bangko Sentral ng Pilipinas Governor Amando Tetangco Jr. was quoted as saying last month, manifesting a hopeful stance that the country would soon attain the much coveted investment status.

But for Finance Secretary Cesar Purisima, the Philippines actually deserves an investment grade right now.

He claims that the country’s fundamentals are comparable to those of countries that already enjoy investment rating. For the finance chief, getting a one- or two-notch upgrade for the Philippines is just a matter of providing ratings agencies a much clearer picture of the country’s actual credit worthiness.

For one, the government’s debt-to-GDP ratio has significantly declined over the past few years, settling at just about 50 percent in 2011. This level is considered comfortable, according to international standards.

Also, thanks to healthy inflows of remittances and foreign investments in the business process outsourcing (BPO) sector, the Philippines’ foreign exchange reserves have been growing year after year. It now amounts to about $77 billion.

Capital market players agree that the country’s ability to meet its obligations has substantially improved over the years. In fact, as far as the capital market is concerned—whether credit-rating firms make it official or not—the Philippines already has an investment grade, they added.

Jonathan Ravelas of Banco de Oro said that the interest rates sought by investors when buying Philippine bonds are already comparable to the rates carried by debt instruments issued by investment-grade countries.

Philippine bonds are actually being traded at interest rates lower than those of Indonesia, which received an investment rating last year.

But while capital market players say that getting an investment grade is now just a formality, one cannot blame the government in being earnest about securing it.

According to Purisima, there are still a lot of job-generating foreign investments out there that the Philippines may corner once it secures an investment grade.

If any credit agency were to upgrade the country’s status this year or the next, it would probably be Fitch. This is because Fitch has rated the Philippines to just a notch below investment grade, while Moody’s and S&P have both rated the country at two notches below the coveted mark.

In a June 2011 report on its decision to upgrade the country’s rating, Fitch cited the country’s declining debt burden, the improving external liquidity backed by a surge in foreign exchange reserves, and the macroeconomic stability as evidenced by a continually growing economy.

However, Fitch came up short of signaling that the Philippines could actually get another upgrade within the short term. In fact, Fitch hinted that the rating of a notch below investment grade could stand for about a year or so.

While improvements in the country’s tax collection, debt ratio, and foreign exchange reserves have been laudable, Fitch said it would take more than that for a country to attain an investment grade.