By Chino Leyco
The recent credit rating upgrade is expected to entice more investors into the Philippines, the Department of Finance (DOF) said on Wednesday.
In a statement, Finance Secretary Carlos G. Dominguez III said S&P Global Ratings’ “BBB+” credit score for the Philippines would make the country a more attractive investment destination in the region.
The greater investor confidence is on top of the lower borrowing rates that both foreign and domestic creditors would give the Philippines, Dominguez said.
“This is a definitive win for the Duterte administration. The Philippines has grown at an impressively rapid rate over the past decade, outpacing many other countries, and S&P believes that we will continue to achieve above-average growth,” Dominguez said.
According to Dominguez, the upgrade is attributable to the tax reform for acceleration and inclusion (TRAIN) Law; infrastructure program; the country’s young, educated and skilled workforce; and the Philippines’ sound external position.
Last week, S&P raised the country’s long-term sovereign credit rating to “BBB+” from “BBB.” The new status is just a notch away from “A minus” which is within the sterling “A” credit-rating territory.
“The S&P report validates the soundness of the Duterte administration’s aggressive spending program to address the infrastructure gap. This is especially important, given that inadequate infrastructure is among the major deal breakers for investors and is one of the biggest constraints to achieving our goal of inclusive growth and poverty reduction,” Dominguez said.
Credit ratings reflect the ability of a country to manage and pay back its debt. S&P’s upgrade last week indicates that the Philippine government has further improved on its ability to pay back its long-term debt, he said.
“We did not pursue reforms to get a better credit rating. This upgrade is the effect of pursuing game-changing reforms that would lead to a flourishing economy and a more comfortable life for our people,” Dominguez said.
“The effects of a Triple B Plus rating may not be immediate, but it is very clear that this is a stepping-stone to our goal of achieving and sustaining upper middle-income country status,” he added.
Dominguez said the Philippines’ newly minted credit rating upgrade, the highest it has received thus far, means investors would now require lower interest rates for Philippine bonds and stocks, making financing cheaper for the government.
“It is important to note that institutional investors already consider us ‘single A- rated’ and are willing to accept lower interest rates to invest in our products. They believe we can do it and we must show them that, indeed, we can,” he said.
The private sector, for its part, can more easily and affordably tap international sources of funding when they borrow from overseas sources with this new credit rating upgrade, Dominguez said.
“This upgrade is a ‘green light’ to invest more in our fast-growing economy,” he said. “More foreign direct investments (FDIs) means more jobs, increased productivity and higher incomes for our people. FDIs will help sustain our rapid growth and make it more inclusive.”
Dominguez said the latest credit rating upgrade “is a direct result of the President choosing to invest his political capital wisely in difficult but game-changing reforms” such as the
TRAIN Law and the shift from quantitative restrictions (QRs) to tariffs on rice imports.
President Duterte’s “sustained high approval ratings are complemented by credible, third-party affirmations of his decisions, such as that of S&P,” he noted.
“Even when critics were noisy, President Duterte chose to throw his full support behind meaningful reforms because these would benefit the Filipino people. For this, we also recognize the efforts of the House of Representatives and the Senate in passing critical legislation,” Dominguez said.
He said the S&P upgrade puts the Philippines above countries like Italy, Portugal and Indonesia; just a notch below countries like Spain and Malaysia; and on the par with countries like Mexico, Peru and Thailand.
Dominguez pointed out that in its report, S&P also cited TRAIN for increasing the government’s ability to fund public investments with less reliance on borrowings.
“When we do borrow, we prioritize official development assistance or ODA as it has cheaper and longer terms of repayment as opposed to borrowing from private capital markets,” he noted.
He said S&P also expressed confidence in the Duterte administration’s quick and decisive steps last year to tame inflation, which has decelerated to 4.4 percent in January and further slowed down to 3 percent in April, or well within the government’s target range of 2-4 percent.
The current account deficit was also viewed by S&P as a positive factor, as it is largely “investment-driven” and the result of the increase in imports of machinery and equipment for the “Build, Build, Build” program, Dominguez said.
Given this improved credit standing, he said the country must now continue to harness one of its competitive advantages – its young and skilled labor force – which is why the government is sustaining investments in education and healthcare.
He also cited the need to pass the Tax Reform for Attracting Better and High-Quality Opportunities (TRABAHO) bill, which aims to lower the corporate income tax (CIT) rate and rationalize fiscal incentives, and the rest of the packages under the. Comprehensive Tax Reform Program (CTRP) to complete the process of making the tax system simpler, fairer and more efficient.
Dominguez also said S&P views as positive signals to further strengthen the economy and increase institutional effectiveness the timely approval of subsequent national budget bills by the Congress and increased participation in the capital markets, which is among the priorities of the Bangko Sentral ng Pilipinas (BSP).