In evaluating which country to invest in, investors normally rely on the International Monetary Fund’s “seal of good housekeeping” for the country.

When the Philippines evaluates from the Funds Past Program Monitoring in the first quarter of 2004, investors will be guided more frequently by sovereign outlooks and credit risk ratings on the country from international credit rating institutions.

Investor guides
Credit rating agencies such as Moody’s and Standard and Poor’s (S&P) for the U.S.; FitchRatings for Europe; and Japan Credit Rating and R&I for Japan tend to be seen or considered as “bellringers,” according to Corazon Guidote, Executive Director of the Investor Relations Office (IRO) of the Department of Finance and Bangko Sentral. Their ratings are widely followed and despite poor calls on the likes of Enron and Worldcom, their credibility remain relatively intact.

Guidote compares them to external auditors, “essential for foreign investors to benchmark their decisions on an independent assessment by an external rating agency.” At the end of each exercise, Guidote points out, “investors will still do what they think is best for their portfolios – the agency’s credit rating is something they can start and compare with, or argue against.”

Consing: Debt rating less critical for Asian investors

Ratings, according to Japan R&I, are statements of opinion, “not statements to buy, hold, or sell any securities.” Nevertheless, for Rafael Consing, Investment Banking Head for HSBC Philippines, “credit rating is extremely important in guiding the decisions of foreign investors to the Philippines – a sovereign borrower tapping the market regularly.”

Consing observes “US and European investors are very much driven by an objective credit rating given by a credible rating agency.” For “Asian issuers accessing the Asian investor base, a formal credit rating is less critical” but the banker hopes it will “become increasingly more sophisticated and will demand for credit rating to be a standard in debt origination processes.”

Enhancing competitiveness
Country credit ratings likewise contribute to an economy’s global competitiveness standing with the rest of the world as the World Economic Forum has tracked down since 1996. The Global Competitiveness Report gauges an economy’s openness to foreign investments, among other criteria. Country credit ratings form part of the macroeconomic environment that can attract investors from abroad.

Fiscal discipline
For the Philippines, one of the outstanding issues of concern to all agencies has always been the fiscal deficit, particularly weak revenue collections. Clearly, the country’s attractiveness for investments is tied to the performance of the Bureau of Internal Revenue. In the last quarter of 2002, both S&P and FitchRatings downgraded their outlook on the Philippines to negative from stable, owing to the poor performance of the BIR. Japan Rating and Investment Information, however, kept its stable rating outlook on the country.

By end-2002, the fiscal deficit widened to P212.7 billion from a P147.0 billion shortfall in 2001. In January 2003, Japan Credit Rating Agency revised its stable outlook on yen-denominated Philippine bonds to negative. Also, Moody’s Investor’s Service downgraded to negative its outlook on local-currency rating for government bonds while at the same time affirming its stable outlook and “Ba1” rating for foreign currency government bonds.

Moody’s has maintained a stable sovereign outlook on the country since February 2002. In September 2002, Moody’s expressed apprehension over a relapse in the performance of the BIR on “fiscal consolidation and sustainability in the medium term.”

By the first quarter of 2003, however, the national government surpassed its P131.9 billion revenue target on the back of strong performance by the Bureau of Customs, despite slight slippage on the spending side.

Credit rating institutions should take note of the country’s improving fiscal picture in the first quarter as well as BIR’s aggressive tax mapping drive in the second quarter of this year. More revenues are expected from pending measures in Congress (corporatization of BIR, indexation of sin taxes, and rationalization of excise taxes on automobiles) and privatization of government assets. Thus, government is confident of achieving its P202 billion fiscal deficit target by yearend.

Recent developments, however, failed to impress S&P when it placed the Philippines long-term foreign currency ratings a notch lower to BB with a stable outlook from BB+ with a negative outlook. Takahira Ogawa, Director at S&P’s Asia-Pacific Sovereign Ratings Group, believes “the central government deficit is likely to remain high at about 5% of GDP.”

Current account revision
Another issue on the Philippines emerged in January 2003. The credibility of the country’s balance of payments statistics, particularly the current account deficit, came under question as a foreign bank brought up the matter of underreported merchandise imports. Monetary and fiscal authorities explained that an interagency task force has been reviewing electronics import data from the country’s economic zones since 2000.

Meanwhile, business commentators compared the situation to the bloating of the country’s foreign reserves in the eighties. Finance Secretary Isidro Camacho received assurance, however, from Moody’s Investor’s Service that the revision would not affect its rating on the Philippines. In fact, the matter has long been discussed with the International Monetary Fund and credit rating agencies. Nevertheless, the issue exacted a costly price for the government in a subsequent bond float abroad.

In its 8 January statement reaffirming the “Ba1” foreign currency rating on the Philippines, Moody’s said that “revisions in estimates of the current account balance do not reflect weakness in the balance of payments as official foreign reserves have been boosted in recent years and remain in relatively sound position in relation to near- and long-term debt service obligations.” At end-January, the gross international reserves stood at US$16.4 billion, equivalent to five months worth of imports of goods and payments of services and income.

Moody’s likewise expects Philippine exports to continue to rebound impressively “as long as external conditions remain favorable.” The agency believes in the resilience of the country’s “stable and productive export base.”

Rising debt
While foreign reserves are at a comfortable level, credit rating agencies also look at the size of the country’s debt, debt service ratios, and maturity profile of both domestic and foreign debts. In the recent S&P ratings action, Ogawa projected general government debt to reach 85% of GDP in 2003 compared to the median level of 50% among other sovereigns. According to S&P “failure to improve fiscal management could further weaken confidence, potentially putting pressure on the currency.” A falling peso may raise debt service costs, and increase “fiscal rigidity,” combined with the increase in general government debt burden to affect the country’s credit rating.

Iraq war and SARS
The S&P downgrade was preceded by regional assessments on the impact of the war in Iraq and the SARS epidemic on country ratings. With a negative outlook on its sovereign ratings, S&P on 11 February identified the Philippines as vulnerable to a downgrade should a prolonged war in the Middle East worsen fiscal accounts. A worsening economic environment would entail spending cuts for the country, which faces “deteriorating debt dynamics, given a past accommodative fiscal stance, diminished prospects for privatization receipts and high debt stocks.”

Also last 16 April, S&P projected that its GDP growth outlook for the Philippines of 4.5% would be shaved by 0.1% to 1.0% this year due to the outbreak of SARS in Asia-Pacific. S&P noted that tourism receipts contribute 2.4% to the country’s domestic output.

Japan Credit Rating Agency, for its part affirmed the BBB/Negative ratings on Philippine-issued bonds last 15 April, recognizing a stronger possibility of achieving the government’s fiscal deficit target of 4.7% of GDP this year.

Meanwhile, the Department of Finance hopes for a favorable ratings action from FitchRatings.