Fitch, an international credit rating agency, just upgraded the credit of the Philippines to BBB-, the lowest of the investment grades. S & P, another rating agency, is about to do the same soon. We are now with the likes of Azerbaijan, Colombia, Iceland and India; higher than Indonesia (BB) but lower than Thailand (BBB+).
An investment rating is an assessment of a country’s ability to pay its debts, a supposed seal of financial housekeeping. Countries are divided into investment grade and non-investment grade following an arbitrary scale from AAA (Australia, Canada, Singapore and several Scandinavian countries) to CCC (Cyprus). The U.S. and China have a rating of AA+ and AA- respectively. The closest the Philippines has come to an investment rating was in the mid-1990’s under FVR and in the first years under GMA.
In addition to the alphabetical ranking, countries are classified as stable, positive (likely to be further upgraded), or negative (likely to be downgraded). Fitch has classified us as stable.
There are three companies that dominate the credit ratings industry–Moody’s, S & P and Fitch. Incidentally, these are the same companies that rated Enron as investment quality just before it went bankrupt. They classified several European nations (Spain, Italy) as worthwhile until it was determined they really are in trouble. These agencies are currently under investigation by U.S. authorities for their role in the mortgage fiasco that almost brought down the world banking system, ripping off thousands of innocent investors. They had sanctified –and collected millions of dollars in fees in the process -various mortgage products as triple A which subsequently proved to be junk.
So, yeah, like the blessing of a pedophile priest, we should view these rating agencies’ endorsements for what they are, often conflicted, many times unreliable and occasionally dangerous. Yet because institutional investors rely on them for legal compliance they are perceived to have value -and in the game of finance perception is reality. As a result of our new found status, more institutional funds can now buy our sovereign debt thereby lowering our cost of money and, God forbid, encouraging us to get further into hoc (The Philippines can now borrow dollars 10 years at 3.41% p.a., cheaper than higher rated countries like Italy (BBB+) at 4.38% and Spain (BBB) at 4.75% which simply confirms the flaws in the rating system).
An investment rating will also encourage direct foreign investment and, hopefully, jobs.
Our improved rating testifies to our strides in cleaning house -as indeed we have and kudos to the Administration for it. However let us understand what an investment grade rating does not mean.
It does not mean we can as a nation necessarily pay our debts. By definition one can only retire one’s obligations by creating surpluses. Yet even our finance team acknowledges we will be running budget deficits –and therefore further increasing our debt- for the foreseeable future albeit perhaps as an increasingly lower percentage of our GDP.
An investment grade rating does not mean all Filipinos are better off, only that some are better off, principally capitalists and landowners. Since PNoy’s inaugural in June 2010, the stock market has risen by 206%, the peso has appreciated by 15%, real estate and corporate profits by over 50%. Yet the average daily wage in constant U.S. dollars from 2010 to 2012 (the latest available) has dropped (!) from $8.91 to $8.74 and the underemployment rate has increased from 17.8% to 20.9%. Surveys indicate people are hungrier than before. At the same time, rising property prices has put housing outside of the means of the lower class and increasingly of the middle class.
An investment grade does not mean that justice for the poor is better served.
It does not mean that fewer journalists and human rights activists are being killed.
It does not mean our streets are safer, our children better educated, our homeless sheltered or our weaker cared for.
It does not mean the environment is better protected, in fact the contrary may be the case.
It does not mean we are a stronger democracy.
So while an investment grade might be an occasion to toot our horn, it is not a measure of the quality of life of Filipinos. We can trot it out as proof of progress but unless it benefits the man in the street, we must ask how meaningful it really is.