Credit ratings firms should boost the nation to investment grade as it has produced marked improvements in its investment and debt ratios compared to gross domestic product, but agencies have failed to act on the progress made, said Philippines finance secretary Cesar Purisima.
The country is rated ‘Ba2’ by Moody’s, which is two notches below investment grade. Standard & Poor’s and Fitch rates it ‘BB+,’ which is one level below investment grade and puts it in the same category as Turkey, Hungary and Guatemala.
“The market rates us now about two notches above investment grade based on bond headline ratings. We are between three and four notches underrated so probably making us one, if not one of the most underrated countries in the world. What the credit ratings agencies do is really their business,” he told Asiamoney PLUS in an interview in Hong Kong on October 9. “Ultimately they’ll have to recognise that their ratings are way behind the market consensus.”
Philippines’ 4% sovereign bond maturing in 2021 is trading at 85 basis points over 10-year US Treasury (USTs) yields, while Indonesia’s 3.75% deal maturing in 2022 is trading at 129 basis points over 10-year USTs.
The minister said the Philippines deserves investment grade status after President Benigno S. Aquino III’s administration was able to bring down foreign debt-to GDP ratios to below 30% from 70% immediately after the Asian financial crisis. The country was also able to lower interest payment costs as a percentage of its budget to 16.6% and extend their debt maturity profiles over two years through debt management programmes, he added.
“We are investment grade. I cannot control them but I hope they make their move sooner rather than later. We have a case for it,” said Purisima.
The finance ministry is also working with the Bureau of Internal Revenue and national collection agencies to target 1.5 million self-employed entrepreneurs, as well as importers and estate-tax evaders to boost tax revenues while stepping up measures to battle corruption. The United Nations estimates that more than 10% of the country’s gross national product is lost to corruption.
“The fight against corruption will be a long journey. And it will require many changes. But that doesn’t mean that you won’t be able to get improvements or results,” said the minister. “That is what I’m working on to make it more difficult to be corrupt by setting tougher targets and continue to monitor not just from the top but the specific levels and areas.”
But despite these improvements, Fitch says the Philippines still has some way to go in increasing per capital income, raising the investment rate and fiscal revenue and battling corruption for it to become an investment-grade sovereign.
Fiscal revenue was just 14% of GDP against the ‘BB’ median of 26% and GDP per capita was US$2,400 last year, which was lower than Turkey and Costa Rica but higher than India, according to Fitch’s most recent report dated June 20. The investment rate comprised of 22% of GDP last year, while foreign direct investment inflows were lower than the median for a ‘BB’ credit.
“The key outstanding issue for the credit profile at this point is structural factors. In particular, the fact that the Philippines average income is low. It scores poorly on the UN human development index. The overall investment environment is not particularly conducive relative to rating category peers,” said Philip McNicholas, director of sovereign ratings at Fitch.
However, finance secretary Purisima said having lower GDP per capita may not be the right argument for keeping the country below investment grade.
“I don’t really think that judging countries purely on per capita, holding them back on per capita may not be the right approach because if you look around now there are some countries that have [a] very very high per capita and are in trouble and low per capita [countries] are doing well,” said Purisima.
The Philippines may also have to prove that these improvements will be sustainable after President Aquino leaves office in 2016.
“At this stage a lot of the improvements that the government is talking about are anecdotal in nature. We’re waiting for some sort of confirmation in terms of various indicators, the effectiveness of public expenditures particularly when it comes to capital spending. The low fiscal revenue is a particular weakness because it constraints fiscal space for the government to expand on public capital expenditures,” he added. “Two years is really not long enough to see these things actually come through.”
The Philippines ranks higher in the GDP per capita category compared to India’s US$1,500. But India’s lower portion of foreign-owned debt and higher investment rate of 33% as of the end of 2011 gives it an investment grade of ‘BBB-‘ by Fitch and Standard & Poor's. Moody's rates it ‘Baa3.’
India's higher investment rate and stronger GDP growth are key reasons for the one-notch difference between the two sovereign ratings. Additionally, India has little, if any, foreign currency debt, where as for the Philippines, half of its debt is foreign currency denominated, making its public debt dynamics more sensitive to currency fluctuations,” said McNicholas.
The debt-to-GDP would also rise sharply if a one-standard deviation is applied as a shock scenario to the currency because of the larger ownership of its debt from foreigners, indicating the peso’s higher sensitivity compared to India, he added.
Still, the Philippines has been upgraded twice so far since 2009 by Moody’s, which signifies that the country has reaped more improvements that it initially had planned, according to Christian de Guzman, a sovereigns ratings analyst at Moody’s.
The World Bank raised the Philippines’ GDP target to 5% for this year. Purisima said he hopes the country’s GDP will reach 7%-8% growth in the coming years without providing a time frame.