Philippine long term credit rating

According to the Institute for Development and Econometric Analysis, Inc. (IDEA) Economic Trends, “sovereign credit ratings and changes in it are important indications of relative credit risks that shape investors confidence, determine prices of securities, and direct the movement of capital. Strong credit ratings lend to lower cost and availability of funds that can help boost economic growth through increase in investments. As they attract investments, the flock of investments, along with sound governance, provides foundation for further upgrades. While earning investment-grade credit ratings mainly depends on actual delivery of low default risk, it has been a long and wobbly challenge for the Philippines. It was only until recently that the country has provided reasonable expectation of low default risk that it was rewarded with positive ratings”.

Furthermore it reported that, “the Philippine sovereign credit ratings have recently broke half a decade of slumber preceded by years of slump when major credit rating agencies namely Standard and Poor's (S&P), Moody's Investor Service (Moody’s), and Fitch Ratings (Fitch) awarded positive ratings since November 2010. These were courtesy of the country’s better external payments position, efforts in consolidating the fiscal account, and favorable growth prospects. The local currency rating considers the likelihood of payment in the Philippine currency while the foreign currency rating includes transfer and convertibility risks. These risks take into consideration possible additional costs of currency transfer and the probability that the country may not be able to pay in the desired foreign currency. Along with favorable conditions, the transfer and convertibility risks explain the brief brush of the long term local currency rating in the BBB (S&P and Fitch) and Baa3 (Moody’s) investment grade category while the long term foreign currency rating is yet to breach this category”.

The differences in the qualitative and quantitative assessments of the rating agencies are reflected in part by the differing times of upgrades and downgrades with some lagging by several years before converging. Although the rating agencies consider the same variables such as political risk, monetary stability, overall debt burden, and national government, they are weighted differently in the analyses.  

The Philippine economy contracted by 0.6 percent on 1998reeling with the effects of the 1997 Asian financial crisis while inflation was generally increasing due to the negative effects on agriculture supply of the El Niño phenomenon. Although it was downgraded to BBB+ by S&P, the long term local currency rating was well within the investment grade. The decision of S&P and Moody's to retain the long term foreign currency ratings lie in the confidence of a relatively resilient Philippine economy amidst the financial troubles in Asia. This foresight proved reliable as the Philippine economy immediately bottomed out of contraction in 1999 by growing 3.4 percent and 6.0 percent in 2000. Meanwhile, the year-end double digit inflation of the previous year fell sharply to 3.9 percent and 2 percent in 1999 and 2000, respectively. Applied tariffs were also more than halved from 26 percent in 1992 to 10 percent in 1999 in a move towards a more open economy. (to be continued)

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