(Editor's Note: Jose M. Galang, a former Philippine correspondent for international media institutions like Financial Times and Far Eastern Economic Review, has joined ABS-CBNnews.com as a regular columnist. He has been writing about issues in business/economics and politics over the past 40 years, and headed newsroom operations of five national dailies at different times. He has also written two books about the Philippines for Euromoney Books.)
MANILA, Philippines - Never mind if the credit rating agencies have a low credibility these days, our economic managers are determined to get for the Philippines an “investment grade” mark soon, perhaps towards the end of this year. Such a status would be a welcome change from an image badly tarnished by years of corruption in high places and economic growth that favored only a few sectors.
It matters less too whether an investment grade rating is simply a confirmation that investors are doing it right or whether an upgrade is a really go-signal for investments to move into a particular territory. Indonesia, even before it was “blessed” with such an upgrade last October, has been actually getting a large chunk of investments finding their way into Southeast Asia.
Obviously for the Aquino administration, a higher mark from the credit rating agencies could quickly be interpreted as a confirmation that its governance strategy anchored on anti-corruption initiatives and sound fiscal programs can be relied upon to eventually stimulate investment inflows that will strengthen the nascent economic growth.
An investment grade rating, said Bangko Sentral Deputy Governor Diwa Guinigundo last week at the well-attended Philippine Economic Briefing, is “desirable because it will formalize the confidence and trust of the market in the viability of doing business in the Philippines and offering more job opportunities for our people.”
That the rating upgrade could be deemed possible amid turbulent conditions now clobbering the world’s major economies makes it a worthwhile aspiration to work hard for. The rating agencies have downgraded almost all of the industrialized economies of the West over the past three years.
But wait, who are these groups giving out such credit ratings and how confident should governments and policymakers be that the raters’ words would be heeded by investors? An impression one gets from recent events involving rating companies is that such ratings may not necessarily be the result of comprehensive research but are instead labels that may be bought by entities—banks in particular—that need them to sell certain products.
Standard & Poor’s Ratings Services (S&P) is the biggest of these raters. Two weeks ago the US Department of Justice sued S&P on charges of falsely advising investors that its ratings were accurate, independent and free of bias, according to news reports.
This accusation was not the first made against rating companies. In April 2011 a US congressional investigation came up with the conclusion that S&P and another big credit rater, Moody’s Corp., were responsible for the 2007 global financial crisis by continuing to give top ratings to mortgage-backed securities even after the US housing market had started to crash.
A January 2010 paper from an Asian Development Institute-commissioned study concluded that credit rating agencies “bear some responsibility” for the financial crisis that erupted in 2007. “It became clear that, given the depth of the crisis, [the rating agencies] would not be able to satisfy policymakers by eliminating flaws in their rating methods and improving corporate governance,” the paper said.
Explanations that the credit rating agencies came up with mostly centered on their contention that credit ratings are “forward-looking opinions about creditworthiness and risk” and that such opinions are protected by the US constitution.
Based on these developments, shouldn’t the government focus on simply continuing its efforts at improving the local investment conditions and leave the campaigning for the credit rating agencies’ perceived imprimatur to other parties that might benefit more from it?
After all, good economic performance can speak for itself. What our policymakers should work on are possible adverse effects that such improved investment inflows will have on local consumers and certain industries.
A major impact of any country’s credit rating upgrade is a boost in its capability to secure new debt in the financial markets. Most likely, investors would find better comfort in grabbing debt papers that an issuer with an investment grade rating would float. Is the Aquino government planning to plunge into a new debt-driven economic growth similar to the strategy employed during the heyday of the Marcos regime?
As finance officials have acknowledged, any dramatic rise in new capital moving into the country will also “strengthen” local interest rates and the peso. That means further cuts in the local purchasing power of overseas Filipinos’ remittances, the biggest force behind the consumption-driven growth of the past few years.
Also, as seen in recent months, a “stabilized” peso can weaken the Philippine economy’s terms of trade—with imports effectively becoming cheaper and exports more expensive in the world market.
On the other hand, that situation will also provide a better opportunity for local industries to import equipment, spare parts and raw materials to beef up manufacturing capabilities. Whether that will also result in lower prices for manufactured goods, however, remains to be seen.
Our economic managers should perhaps become more focused on policies and strategies that will mitigate these possible negative impact of any rise in investment inflows. Campaigning for endorsements from discredited rating agencies is one “priority” we can do without for now. Investors are good at smelling viable opportunities for making money even halfway around the globe.