What a credit ratings upgrade means for the Philippines

Imagine your parents paying P10,000 monthly amortization to a lender for a housing loan. Let’s assume that they have been paying religiously and on time during the entire duration of the loan. On the final year of payment, the lender decided to give them a bonus, reducing the amortization to P8,000 per month as a form of goodwill.

The extra cash can now be used by your parents to put more food on the table, to pay for housing repairs and maintenance, or even to increase your weekly allowance. Regardless of where it will be put to use, the savings from the loan reduction will surely benefit your family.

This may sound like a simplistic analogy but that, in short, is also how the Philippines benefits from a credit ratings upgrade.

(Update May 8, 2014): The country received a surprise investment upgrade from Standard & Poor’s (S&P), one of the world’s top credit ratings agencies. S&P raised the country’s long-term sovereign credit rating one level to BBB from BBB- (with a stable outlook), exactly one year after it gave the Philippines its first stamp of approval that it is now investment grade.

(Update December 11, 2014): Moody’s Investors Service upgraded today the rating of the Philippines by one notch to Baa2 from Baa3. The outlook is stable.

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A BBB rating is a “medium investment grade status” which shows that the country has “adequate capacity to meet financial commitments, although adverse conditions or changing circumstances can lead to a weakened capacity to meet financial commitments.”

A Baa2 rating, meanwhile, signifies “adequate capacity to meet financial obligations although there still exists adverse conditions that could lead to a weakened capacity to meet financial commitments”.

With the credit ratings upgrade, the Philippines is now rated higher than Indonesia, Vietnam, Spain, Brazil and India. (See: S&P credit ratings by country, as of May 2014)

Benefits of a credit ratings upgrade

The benefits of an investment upgrade have been discussed thoroughly in various literature. But to reiterate, the following advantages typically comes with a credit ratings upgrade:

1. Lower borrowing costs. Because the Philippines is now considered “less risky” than before, lenders may reduce the interest rates charged on sovereign loans. As in the case of our monthly amortization example above, the Philippines gets to save cash on interest payments which it can use, in turn, to further spur economic growth by investing in infrastructure, education, and social welfare, among others.

2. More foreign capital inflows. An “investment grade” status also connotes “investment-worthiness”, which could be used by foreign companies as motivation to bring capital investments to the Philippines, generating more jobs and higher Gross Domestic Product (GDP) in the long run.

3. Lower interest rates on bank loans. Lower risks could cause Treasury yields to fall and, in the process, affect retail loans tied to the Bangko Sentral ng Pilipinas’ benchmark interest rates, such as housing loan, car loan, business loan or personal loan. With lower interest rates, individuals get to benefit as they could decide to take on a loan to build a house or to establish a business.

4. Peso appreciation. The credit ratings upgrade could also lead to a stronger currency as more investors would prefer to hold assets in Peso, since local investments might prove to be more attractive than investments denominated in foreign currencies.

Of course, all these advantages would not accrue to the Philippines overnight. It could take years before the upgrade can deliver significant impact to Filipinos, especially those in the lower rungs of the society. But this is a good, first step and we should not waste the opportunity.

What the upgrade should mean to Filipinos

In the end, the credit ratings upgrade should not merely bring hope while passively waiting for future benefits to come, but should provide a challenge for Filipinos to become more responsible and proactive in preserving our current, enviable state.

In giving the upgrade, S&P cited the Aquino administration’s “gains in revenue generation, spending efficiency, and the improvements in public debt profile and investment environment” and the stable outlook would remain if we continue this economic climate in the years to come.

What better way to start ensuring a better future for our generation and future generations than to elect leaders who would usher us to this goal. This is not a political piece but let this be a call for wiser, more responsible elections in 2016. We all deserve this future, but it is us who will seal this future now.

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