Countries and corporations have a love/hate relationship with the global credit rating agencies
—Moody’s, S&P, and Fitch.
Many countries have their own ratings agencies that offer their services to domestic clients, rating both local and foreign companies and countries. However, the big three hold a global market share of roughly 95 percent, with Moody’s and Standard & Poor’s having 40 percent each, and Fitch around 15 percent.
The ratings are critical for sovereign debt as they determine what lenders expect to receive in interest on that debt. While this is all “by-the-book,” the reality is that governments want to pay the lowest interest possible while the lenders want to receive the highest possible without any risk. There are credibility issues and sometimes controversy on both sides. But the system works.
The credit profile comes in two parts: the Rating and the “Outlook,” with the ultimate purpose to decide if the borrower will be able to pay both the amortization and principal in the future. The ratings range from “junk” to “investment grade.” Within the broad categories are subcategories, and each carries a different amount of risk and commensurate interest rate.
Moody’s considers a Baa3 or higher rating to be of investment grade, and a rating of Ba1 and below is speculative. The Philippine government debt carries an “investment grade” rating at Baa2. The current Outlook is “Stable.”
Moody’s performs an annual credit analysis and update. In September 2019, the report read, “The credit profile of the Philippines [Baa2 stable] is supported by a large and fast-growing economy and continued gains in debt affordability, in part because of revenue reforms. The momentum for fiscal reform has been sustained, improving prospects for a further improvement in the Philippines’s fiscal profile.”
The September 2020 report begins with “The Philippines’s [Baa2 stable] credit profile has been characterized in recent years by strong economic performance, a strengthening fiscal position, and limited vulnerability to external shocks, although the global coronavirus outbreak will disrupt or potentially reverse these trends.” Nothing much has changed in the past year.
But what about the pandemic? “Rating outlook: The stable outlook reflects the view that the recovery from the acute shock posed by the coronavirus outbreak will restore rapid economic growth relative to peers, complemented by the stabilization and eventual reversal of the deterioration in fiscal and debt metrics.” Here are the negatives regarding the economy that could affect the rating: “The reversal of reforms that have supported prior gains in economic and fiscal strength.”
The summary is probably the important takeaway. Moody’s notes the following “Credit Strengths.” Robust growth potential supported by favorable demographics. Moderate government debt levels, improved debt affordability owing in part to revenue reform. A stable and resilient banking system. We have known this for several years. The good thing is that we are still on course with these issues.
The “Credit challenges” are these: Low per capita incomes compared to investment-grade peers. In short, we are a low-income country that is actually outperforming our peers. As usual, “Weak rule of law and control of corruption.” Finally, we face “Exposure to climate change and natural disaster risks.” If that is one of the highest dangers to our credit rating, then we should be thankful since Manila is not going to be covered by the ocean for another 40 years. We have plenty of time to build a better beach.