Manila Makes the Upgrade

April 2, 2013 at 12:18


One of the brighter economic growth stories in Asia over the past year got a little brighter yesterday, when the Philippines earned the first investment-grade sovereign credit rating in its history. This is being rightly interpreted as an endorsement of the reform agenda of President Benigno S. Aquino III, and Manila can congratulate itself for having come this far. But no one should be resting on any laurels any time soon.

Fitch cited several reasons for its rating upgrade. Annual growth exceeded 6% last year and is expected to stay above 5% for at least the next few years. Mr. Aquino (and, to be fair, his much-maligned predecessor, Gloria Macapagal Arroyo) had made strides putting Manila’s fiscal house in order, such that government debt as a proportion of GDP is declining. Fitch also noted Mr. Aquino’s anti-corruption drive, although the Philippines lags its peer group in this regard.

All this is hardly news—credit-rating firms aren’t exactly renowned for telling the world things we didn’t already know—but Fitch’s recognition of realities on the ground confirms that the country is on the right track. Particularly so since a senatorial election is set for later this spring. As Fitch’s analysts write, one of the biggest risks facing the Philippines now is political: that Manila will abandon Mr. Aquino’s reforms when he is term-limited out of office in 2016. Yesterday’s upgrade is a reminder to voters of what’s at stake as they head into the voting booth.

Meanwhile, the rating upgrade brings into focus another challenge facing the Philippines and other developing economies, and this one is not of their own making. The other major rating agencies, Moody’s MCO -1.03% and Standard & Poor’s, also are expected to upgrade the Philippines to investment grade later this year. If and when they do, additional portfolio investment is expected to flood into Philippine stocks, bonds and other assets, as the upgrades clear the way for investment funds that are restricted to putting their money in investment-grade economies.

Analysts already hint that this will further complicate matters for the Philippine central bank. Even without an investment-grade rating, the Philippines had attracted sufficient quantities of foreign investment to set off an appreciation of the peso, to roughly 40 pesos to the U.S. dollar this year from between 43 and 44 pesos to the dollar in 2011. While this helps to contain inflation in an import-dependent economy, further rapid capital inflows could trap Manila in a vise that’s increasingly common in developing Asia—rapid currency appreciation (which would argue for lower interest rates to deter excess capital inflows) versus mounting asset inflation (which would require higher interest rates).

This happens not least because ultra-low interest rates in the developed world, resulting from one round of Federal Reserve, Bank of Japan and European Central Bank easing after another, are pushing global investors further and further afield in search of relatively safe returns. Thanks to Mr. Aquino’s political efforts, the Philippines is now a relatively safer place for those investors than it used to be. That’s a good thing for the millions of Filipinos awaiting their chance to rise out of poverty, for whom additional investment can spur further growth. But it will be a challenge for policy makers left to navigate the shoals of global incentives distorted by faraway monetary policy.

Source: The Wall Street Journal. 27 March 2013.

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