Credit upgrade: OFW blood, sweat, tears
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BusinessWorld, May 07, 2013
The Philippines received another "trophy" -- an upgrade to BBB- credit rating -- this time from Standard & Poor’s. Predictably, President Aquino and his economic men were jumping with joy. They boast that the upgrade was due to the reforms under the Aquino administration and the "strong economic and fiscal gains." Seriously? What reforms? The last time I looked, the administration continues to underspend and under-collect taxes.
Here’s what S&P credit analyst Agost Benard said: "The upgrade on the Philippines reflects a strengthening external profile, moderating inflation and the government’s reliance on foreign currency debt."
"We expect the country to move into near-balanced external position because of persistent account surpluses, in which large net transfers from Filipinos working abroad more than offset ongoing trade deficits."
But what’s the real score? The "persistent account surpluses" is due more to the blood, sweat and tears of overseas Filipinos workers (OFWs). Without the steady, strong and substantial annual OFWs remittances, I doubt whether any upgrade would have been warranted.
The OFWs were responsible for bringing in more than $20 billion every year -- much higher than our trade deficits. That explains the historic high $84 billion gross international reserves. Thanks to the steady inflows of OFW remittances, the GIRs now exceed more than a year’s imports requirement, when three to four months imports requirements would suffice.
The GIR level is also much higher than the country’s existing foreign debts.
And because of the country’s huge GIRs, the risk of a default on our existing foreign loans is practically nil. That’s what a BBB- rating is all about.
"Credit ratings are forward-looking opinions about credit risk." A BBB rating means that: the obligor "has adequate capacity to meet its financial commitments. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitments."
To put is harshly, the credit upgrade has nothing to do with rising joblessness and the unchanged, high, and persistent poverty. The Philippines’ international credit standing has improved, but it does not necessarily mean that the economic welfare of many Filipinos have improved, especially for the jobless and the poor.
Among ASEAN-5 member-countries, the Philippines’ credit ratings are worse than Malaysia and Thailand but a notch better than Indonesia and three notches better than Vietnam.
Should the present administration get credit for "moderating inflation and the government’s reliance on foreign currency debt?" On moderating inflation, not necessarily. Inflation is subdued because of the appreciating peso (in large part due to the tidal wave of "hot" money inundating the country) and the falling price of oil and oil products in the world market.
The Bangko Sentral ng Pilipinas (BSP) has been cutting the special deposit account (SDA) rates. Right move -- though such move is clearly not anti-inflationary. By the way, further cuts may be needed to have an impact on the entry of hot money into the Philippine financial system.
On the moderating reliance on foreign currency debt, fiscal authorities deserve credit for changing their deficit financing strategy. They promise to rely solely on domestic borrowing to finance the deficit. Such move, though done reluctantly and belatedly, was the right one, too.
Will the upgrade make a difference in the borrowing costs of the government?
Unlikely, or at best, marginally. The upgrade has been fully anticipated. Even before the upgrade, the Philippines can borrow from abroad at rates that approximate those for investment-grade countries. And lest we forget, we really do not need to -- and should not -- borrow from abroad at this time. Foreign borrowing will only exacerbate the appreciation of the peso, a most critical economic problem, following the severe employment and underemployment.
There’s too much liquidity in the domestic financial markets. This is evidenced by the huge balance in the BSP’s special deposit accounts, now estimated at P1.8 trillion.
Will the S&P upgrade lead to the inflow of more foreign direct investments (FDIs)? That is what Philippine authorities are hoping for. Sadly, the upgrade does not guarantee more FDI inflows.
There are many factors that affect the entry of FDIs, namely: cost of doing business, state of public infrastructure including the price, sufficiency and reliability of power supply, policy consistency, and political stability. In addition, the economy has to be open to foreign capital. Yet, there are restrictive provisions in the Constitution that deter the entry of foreign direct investors; they have to be amended.
Among ASEAN-5 member-countries, the Philippines’ credit rating is lower than Malaysia and Thailand but a notch higher than Indonesia and three notches higher than Vietnam.
The inconvenient truth is that being rated investment grade is not even a necessary condition for the entry of huge FDIs. Indonesia and Vietnam, both with speculative credit ratings, have received more FDIs than the Philippines in the past. In the last three years,the Philippines attracted a total of $5.9 billion FDIs -- only a fraction of what Indonesia ($52.5 billion) and Vietnam ($23.5 billion) did.
FDIs follow the promotion to investment grade of any country. True, false or uncertain? As in many questions in Economics, the answer is it depends. It depends on whether the government of the day has the political will, perseverance and competence to carry out more serious policy reforms.
The challenge is for the President and his team to work incessantly to remove the factors that deter FDIs -- horrendous public infrastructure, high costs of doing business, uncompetitive regime, poor regulatory and legal framework, government ineffectiveness, policy inconsistency, and the restrictive provisions in the Philippine Constitution.
Benjamin Diokno served as secretary of Budget and Management from 1998 to 2001. He is professor of Economics at the UP School of Economics.