Japan agency keeps positive RP rating

The Japan Credit Rating Agency (JCRA) has affirmed the country’s credit ratings and maintained its “positive” outlook rating, saying that the Philippines is able to sustain stable economic growth.

Despite the ongoing market turmoil and generally bleak outlook on the global economy, JCRA maintained an upbeat attitude towards the country’s prospects.

Usually the most upbeat of the four major credit rating agencies, JCRA said earlier that it would start considering upgrading the country’s credit rating when it could reaffirm that its macroeconomic performance would continue.

JCRA warned, however, that it is necessary for the Arroyo administration to strengthen its tax collection capability while ensuring that economic performance would lead to an expansion of tax revenues.

But JCRA said in its evaluation report that it is retaining its BBB- credit rating on the country’s foreign and local currency long-term senior debts with the outlook rating at “positive” which kept the country in the line for possible upgrade.

JCRA expects the economy to sustain its growth as inflationary pressures are expected to ease as oil prices also eased and because remittances from overseas Filipinos would keep people spending.

The agency warned that the US turmoil would have an impact on the market but remarked that the stability of the Philippine financial system has improved significantly anyway.

JCRA expressed concern over political noise but concluded that anti-government forces “did not seem to have enough power to overthrow the President” despite their success at taking advantage of discontented elements in the military.

JCRA also expressed satisfaction over the improvements in the government’s fiscal position, especially if this would mean an increase in public spending on critical infrastructure.

However, the peso was also significantly weaker this year as foreign exchange inflows gradually drained and thinned out the country’s current accounts, ultimately stressing the balance of payments.

High inflation is expected to put pressure on the country’s fiscal and current account balance but credit rating agencies said monetary tightening is easing the impact in emerging economies like the Philippines.

Credit agencies have been concerned that the decline in disposable income, potential increase in unemployment and higher costs of items ranging from food to utilities are “crimping household spending” which had been the principal macroeconomic driver of demand.

For businesses in particular, the downside of higher inflation was likely to result in compressed corporate margins since inflation increases the cost of production without allowing producers to pass the increase to their end-users.

Earlier, Standard & Poors said the risk was also higher for investors in fixed-rate instruments since their margins would shrink if not disappear altogether, eaten up by higher prices.

According to S&P factors that used to firmly anchor inflationary expectations are no longer as effective. These include high productivity and greater integration into the global economy of low-wage, low-cost countries like China and India.

“The credibility of central banks is seen increasingly at risk in both developed and emerging markets,” S&P said.

In emerging markets such as the Philippines, years of high economic growth and monetary policy easing were providing a contrast to the decisions that have to be made now, when inflation rate was soaring. 

“Furthermore, subsidization of food and fuel in many countries compounds pressure by aggravating fiscal and current account balances, with its attendant negative impact on the cost of capital,” S&P said.