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Thursday, March 28, 2013

PH Earns Investment Grade from Fitch

In case you missed it, the Philippines earned its first investment grade rating from global credit rating firm Fitch.

An investment grade means the Philippines, as a borrowing country, has a strong ability to pay its debt. It basically tells investors that it is safe to do business in the country and help encourage them to put up their capital here.

The Rappler provides a great summary of the reasons why Fitch granted the Philippines an upgrade:

RESILIENT REMITTANCES. Remittances, which account for 8% of the Philippine economy in 2012, stayed resilient despite the global financial crisis. The inflows from overseas Filipino workers (OFWs), which grew 6.4% to US$23.8 billion in 2012, supported a strong net external creditor position, which accounted for 12% of GDP in 2012. This means there are more dollars flowing into the country than those being paid out (like payment for imports).
RESILIENT ECONOMY. The 6.6% growth rate in 2012 made the Philippines stand out amid the struggling economies of rich countries in the west. "The Philippines has experienced stronger and less volatile growth than its 'BBB' peers over the past five years," Fitch said.
FISCAL PRUDENCE. Fitch cited the improvements in the fiscal management during the administration of former President Gloria Macapagal Arroyo. These reforms, which included the passing of the VAT reform law in 2005, "have made general government debt dynamics more resilient to shocks." Fitch noted that under President Benigno Aquino III, the government ably managed the country's foreign debts, which has fallen to 47% of total government borrowings, from 53% at end-2008.
PRUDENT MONETARY STRATEGY. Fitch has cited the Bangko Sentral ng Pilipinas' (BSP) inflation management track record and proactive use of monetary tolls to support the economic growth.
GOOD GOVERNANCE. Fitch noted that governance reforms, which have been a centrepiece of the Aquino administration's policy efforts, must remain a priority of the Aquino government and institutionalize these beyond 2016. Fitch also said that the Philippines' good governance scores based on standards of international groups like the World Bank "remain weaker than 'BBB' range norms but are not inconsistent with a 'BBB-' rating as a number of sovereigns in this rating category fare worse than the Philippines."

What Does it Mean?

The Investment Grade rating can trigger a lot of positives for the Philippines:
1. Lower Interest Rate on debt
2. Lower borrowing costs
3. Less risk in PH markets
4. More foreign investments
5. More money to spend for economic stimulus
6. More jobs

The first four can be achieved by reputation, and getting a credit upgrade greatly helps. When investments start coming in, the government will have a better flexibility in planning out spending. The last is a bit more difficult. Creating more jobs would heavily rely on 1. expansion brought by major growth from existing companies; 2. Direct investments to the country, meaning companies would be willing to do business here, instead of, say investing in Philippine stocks or bonds. An environment that is free of regulatory constraints is the key to attract more investors to setting up their own business here, something the Philipphins is still lagging.

photo from to
 In World Bank's 2012 Ease of Doing Business Index, the Philippines ranked only 138th. If you have been to Singapore or Malaysia, you can't help but admire the ease of transportation, even for first timers.

The Philippines has improved, but still catching up. For as long as it remains guided by sound governance and uphold to honest business practices, strong and consistent growth will continue to move us forward, not just for the elite, but for the rest of its people as well.    

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