Standard & Poor’s (S&P) issued on April 30, 2019, a credit rating upgrade of the Philippines, from BBB to “BBB+, stable.” This brings the country to equal Thailand’s rating, to a notch higher than Indonesia’s “BBB, stable” and a notch lower than Malaysia’s “A-, stable.” The description “stable” means that the grade is expected will be maintained in the next one to two years.
“We raised the rating,” S&P explains, “to reflect the Philippines’s strong economic growth trajectory, which we expect to continue to drive constructive development outcomes and underpin broader credit metrics over the medium term. The rating is also supported by solid government fiscal accounts, low public indebtedness and the economy’s sound external settings.”
S&P notes the “consistently above-average economic growth” and makes the forecast of 6.3-percent growth in 2019, 6.5 percent 2020, 6.6 percent in 2021 and 6.7 percent in2022, reflecting a sustained economic growth.
It is instructive to understand the methodology which a credit rating agency follows to arrive at its credit rating. While it is an opinion, the bases for these are important to be publicly known to develop confidence in its thoroughness, objectivity, fairness and consistency assuring that there is overall competence and integrity behind the process. In this regard, credit rating agencies have been very transparent by publishing their rating methodologies in fairly good detail.
In the case of S&P, for example, which gave the Philippines its highest sovereign rating so far, they follow a “Sovereign Issuer Criteria Framework” identifying five key areas for inquiry:
- Institutional assessment;
- Economic assessment;
- External assessment;
- Fiscal assessment; and
- Monetary assessment
For the reader’s convenience, we have extracted this summarized information from S&P “Sovereign Rating Methodology” dated December 18, 2017, readily available from the Internet, all of 39 pages.
Here are the abbreviated meanings of the assessment factors:
“The institutional assessment reflects how a government’s institutions and policy-making affect a sovereign’s credit fundamentals by delivering sustainable public finances, promoting balanced economic growth, and responding to economic or political shocks.”
The economic assessment considers “the country’s income levels as measured by its gross domestic product (GDP) per capita, indicating broader potential tax and funding bases upon which to draw, which generally supports credit worthiness; growth prospects; and its economic diversity and volatility.”
External assessment looks at “the status of a sovereign’s currency in international transactions; the country’s external liquidity…and the country’s external position.”
Fiscal assessment considers “the sustainability of a sovereign’s deficits and its debt burden.”
Finally, monetary assessment considers the monetary authority’s ability to fulfill its mandate while sustaining a balanced economy and attenuating any major economic or financial shocks.”
The assignment of a particular rating by a rating agency is a structured disciplined process consistently applied, and requires the observance of established metrics and professional standards. The judgment of the financial markets which use the ratings is the ultimate test of credibility. Hence, rating agencies are sensitive to their responsibilities and to upholding their reputation for good, trustworthy credit opinions.
A sovereign rating reflects a composite picture of a country’s state of the economy, its growth and potential. A good rating makes for cheaper cost of borrowing in the international capital markets. But more than this, it promotes the country as a worthy investment destination. And not the least, it measures the performance of a country’s economic managers, both in government and the private sector.
A credit rating upgrade is certainly something to fuss about as a collective effort.
S&P makes the observation that “the Philippine economy is 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 investment climate. The country has a relatively diversified economy with an increasingly strong track record of high and stable growth.”
S&P expects the country’s GDP per capita to rise to $3,400 in 2019. Most unfortunately, our growth in GDP does not translate, and has not been translated, to a significant reduction of poverty. It’s a pity.