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Rating Upgrade a Vote of Confidence

The Philippines just received another vote of confidence on the way the administration of President Duterte is handling the economy.


S&P Global Ratings last week raised the Philippines’s sovereign credit rating by a notch to “BBB+” from “BBB” with a stable outlook. The Philippines earned the higher debt rating despite a blip in the economy when the inflation rate acted up toward the latter part of 2018.


I personally believe we will receive more credit rating upgrades from respected foreign institutions in the medium-term period as long as the government sticks to the macroeconomic fundamentals. The Philippine economy has adjusted well to rising oil prices in the world market and the ongoing trade war between the United States and China.


S&P, in its latest rating upgrade, cited the country’s stable outlook, above-average economic growth, healthy external position and sustainable public finances. The rating agency is bullish on the Philippines after it registered economic growth rates of over 6 percent annually for the past several years.


It said it might raise the ratings over the next two years “if the government makes significant further achievements in its fiscal reform program, or if the country’s external position improves such that its status as a net external creditor becomes more secure over the long term.”


A rating upgrade will essentially reduce the cost of foreign borrowings, as banks and lenders view the Philippines as a less risky debtor nation. The lower cost of money, in turn, will lower the production cost in the country and serves as an incentive to companies to borrow more to finance their expansion.


The credit upgrade will also likely strengthen the peso in the near term on the assumption that more foreign investors place their bet on the Philippines. A more robust economic growth is, thus, expected when production costs are lowered and when more foreign investors come in and hire more Filipino workers.


The rating upgrade will make the Philippines more noticeable on the radar map of foreign investors. It has put the Philippines on a par with Mexico, Peru, Thailand and Trinidad and Tobago, and higher by a notch than Italy, Portugal, Hungary, Panama and Uruguay. The BBB+ grade has also moved the Philippines near the coveted “A” territory rating.


S&P noted that the Philippine economy was among the fastest-growing in the world on a 10-year weighted average, per-capita basis—a reflection of its supportive policy dynamics and improving the investment climate.


“The country has a relatively diversified economy with an increasingly strong track record of high and stable growth. We estimate GDP per capita will rise to almost $3,400 in 2019 [we include non-resident nationals in our population data],” the agency in last week’s report. “The rating is also supported by solid government fiscal accounts, low public indebtedness and the economy’s sound external settings,” it added.


The rating agency sees the GDP per-capita growth averaging about 4.9 percent per year over 2019-2022, based on balanced contributions from private consumption and investment growth. The country’s unemployment rate, it said, has been declining for a few years, signaling the economy’s strengthening labor market even as the working-age population continues to grow.


The rating upgrade came at a perfect time as another Philippine delegation holds a roadshow in Europe in preparation for the issuance of euro-denominated bonds. The delegation, led by National Treasurer Rosalia de Leon and Bangko Sentral ng Pilipinas Deputy Governor Diwa Guinigundo, are visiting key European cities to discuss the strengths of the Philippine economy to investors.


De Leon, reacting to the rating up the upgrade, says the government has kept its debt in check “even as we invest more on infrastructure and social services.”


“We are committed to fiscal discipline, and this makes the Philippines a truly creditworthy sovereign in the eyes of the international financial community,” she said.


The economic managers of President Duterte led by Finance Secretary Carlos Dominguez III deserve kudos for the latest S&P upgrade.