Monday, February 13, 2012

...the progress

More Progressive Philippines Will Be Given 'Investment Grade' Rating


Number Don't Lie
By ANDREW JAMES MASIGAN
February 13, 2012

The general outlook is that the Philippines has one of the healthiest economies in the region given its budget surplus position, sufficient currency reserves, low government debt to GDP ratio, low inflation and strong banking system. He believes an investment upgrade is forthcoming for us as well.

MANILA, Philippines — Two weeks ago, Indonesia got a credit rating upgrade from Moody’s Investors Services—putting it at Baa3, restoring its status back to investment grade since the Asian financial crisis of the ’90s. This follows a prior ratings upgrade given by Fitch Ratings, which also put it at investment grade, citing a stable outlook, strong growth and declining public debt.

Indonesia is on a roll. Our neighbor to the south has been siphoning billions of dollars in investments lately due to its stable political environment, sound economic policies and ginormous market of 240 million people. Its recent credit upgrades will only funnel in more capital into this emerging dragon economy. Clearly, the bureaucratic and policy reforms it put in place years ago are now paying dividends.

I recently attended an economic briefing given by the Prudential Group’s asset management director, Robert Rountree, who gave an outsider’s view on the Philippines’ financial health. The Singapore-based Rountree proclaims the Philippines as “looking very solid.” The general outlook is that the Philippines has one of the healthiest economies in the region given its budget surplus position, sufficient currency reserves, low government debt to GDP ratio, low inflation and strong banking system. He believes an investment upgrade is forthcoming for us as well.

The Philippines is now rated as one notch below investment grade according to Fitch, while Moody’s and Standard & Poor’s put us at two notches below. The country stands to gain tremendous economic benefits even if just one among the three credit rating agencies puts us at investment grade. For those unaware of its significance, to be classified an “investment grade economy” is tantamount to a seal of good housekeeping. It tells the investing public that the country is a safe environment to do business in, given its sound economic policies and prudent financial management. It boosts investor confidence, which in turn translates into a deluge of hard currency flowing into the system.

An investment grade economy also means lesser risk of default on sovereign loans. This means cheaper cost of money for our national debt. Since we are talking about billions of dollars here, savings from interest expense can very well be diverted to other uses; perhaps for infrastructure or social development programs.

HSBC’s head of investment strategy, Arjuna Mahendran, also shared his views on the Philippine economy.

He, too, believes the Philippines is deserving of a credit rating upgrade and thinks that it is soon forthcoming.

If so, it will be our sixth consecutive upgrade from the three international ratings agencies in a span of 18 months.

Analysts agree that the Philippines’ and Indonesia’s domestic driven economies insulate them from the financial turbulence in the Eurozone. This is why we have remained relatively strong despite the crisis in the other side of the hemisphere. Less than 10 percent of Philippine and Indonesian trade is with Europe.

The Difference Between ID And PH

While think tanks all over the world recognize Indonesia’s and the Philippines’ sound financial health, the unfortunate thing is that Indonesia is able to cash in on it by attracting massive amounts of foreign direct investment (FDIs), while we do not. Between January and October last year, records show that the Philippines’ haul of FDIs decreased by 25 percent to only $729 million. Indonesia’s, on the other hand, increased by 21 percent; it is, in fact, looking at a grand total of $9.6 billion for the entire year!

Government rationalizes our lackluster FDI performance by blaming uncertainties and financial constraints in Europe. But this line of reasoning is completely debunked by Indonesia’s impressive performance. We operate under the same environment, after all. The real culprit is our expensive cost of power, insufficient infrastructure, policy instability, less competitive fiscal incentives and some investor-harassing LGUs. These issues have to be fleshed out if we are to come anywhere close to Indonesia’s numbers.

On the macro side, the Philippines registered a whole year’s GDP growth of only 3.7 percent while Indonesia rallied ahead with 6.5 percent. Three negative factors contributed to our uninspiring performance last year.

The first is declining exports, which fell by 5.9 percent from the year before—we are really paying the price for our overdependence on the electronics and semi-conductors industry. Agriculture also declined by 2.5 percent due to the series of typhoons. Finally, government’s lack of public spending failed to pump-prime the economy.

Looking Forward

The differences between Indonesia and the Philippines are glaring, at least in as far as FDI generation and GDP performance is concerned. But to be fair, Indonesia has been on its road of reform for nearly eight years now, while we have barely been at it for two years.

Still, we have gained significant traction in our anti-corruption reforms. We have also done a lot to restore confidence in our justice system. These two, by themselves, are huge feats and will have a great impact on how the economy performs in years to come.

But for us to really break away from the pack, just like Indonesia, we need to address certain critical issues. Outdated infrastructure, lack of export diversification, high cost of doing business, and bureaucratic red tape are areas that need attention the most.

While government is doing what it can to address these very issues, getting them done is unfortunately taking longer than we would like. Nevertheless, we are generally on the right track. I am confident that if we simply stay on course, our time will come soon.

Andrew Masigan is an economist, political analyst and businessman. He is a 20-year veteran in the hospitality and tourism industry.

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