Philippines' rating boost: Is it an election stunt?

Philippine stock market soared more than 30 per cent in 2012, one of the best in the world.

The Philippines was once the sick man of Asia: badly managed, corrupt and poor. Years of efforts by the government of President Benigno S Aquino III has paid off with the country receiving this week, for the first time, an investment-grade credit rating from one of the world’s major ratings agencies.

The move, from Fitch Ratings, represented an important vote of confidence for the Southeast Asian island nation, which has been growing at a rapid clip for the past few years but whose per capita income is barely one-quarter that of the United States. The economy remains heavily reliant on money sent home from Filipinos working overseas, called remittances.

“This means much more than lower interest rates on our debt and more investors buying our securities,” Aquino said in a statement. “This is an institutional affirmation of our good governance agenda: Sound fiscal management and integrity-based leadership has led to a resurgent economy in the face of uncertainties in the global arena. It serves to encourage even greater interest and investments in our country.”

Fitch Ratings cited “improvements in fiscal management” begun under Aquino’s predecessor, Gloria Macapagal Arroyo, as one of the reasons for its decision to lift the Philippines’ rating from junk status, increasing it one notch, to BBB- from BB+. The rating applies to the country’s long-term debt denominated in foreign currency.

The upgrade, Fitch said, reflected a persistent current account surplus, underpinned by remittance inflows, while a “strong policy-making framework” — notably effective inflation management by the central bank — has supported the overall economy in recent years.
Investors cheered the news of the upgrade, sending the main stock market index up 2.74 per cent. The upgrade had been widely expected for some time, helping turn the Philippines into something of an investment darling last year.

The Philippine stock market soared more than 30 per cent in 2012, one of the best performances in the world, and has risen an additional 17.8 per cent so far this year — the third best in Asia after Japan and Vietnam. The Philippine peso has climbed 7 per cent against the dollar since the start of 2012.

Foreign direct investment, likewise, rose 8 per cent last year to $2 billion, from $1.9 billion in 2011, as investor confidence in the country has solidified since Aquino took office nearly three years ago.

“This is an upgrade that’s overdue,” said Norio Usui, country economist for the Philippines at the Asian Development Bank, which is based in Manila. “Financial markets have already fully incorporated it. Bold governance reforms under the current administration have changed consumers’ and investors’ sentiment. Prudent macroeconomic management has laid the foundation for the strong growth. This rating will give investors the confidence they need to give the Philippines a much closer look.”

The country’s promising demographics also seem to point toward bright economic prospects. While many Asian nations, including Japan, South Korea and China, are aging rapidly, the Philippine population of 94 million is one of the youngest in the region. About one-third of Filipinos are 14 or younger, according to World Bank data. That compares with 19 per cent in China and 13 per cent in Japan.

“Should the government implement policy to educate andprovide jobs for the burgeoning population, the Philippines could capitalise on its demographic advantages to raise economic output,” economists at HSBC wrote in a research report.

Considerable challenges

HSBC forecasts that the Philippine economy will expand 5.9 per cent this year, slightly less than the 6.6 per cent recorded in 2012 but well ahead of the 3.9 per cent in 2011. Fitch Ratings on Wednesday estimated growth between 5 per cent and 5.5 per cent in coming years. At the same time, the country faces considerable challenges.

Infrastructure in much of the country remains poor and corruption widespread, despite progress under Aquino’s administration. Growth has generated pockets of urban prosperity surrounded by vast areas of grinding poverty and few jobs.

“While we may finally be treading the right path towards inclusive and sustainable development,” Loren Legarda, a Philippine senator, said in reaction to the upgrade, “the challenge remains for us to ensure that there will be overall improvement in the lives of majority of Filipinos.”

Renato M Reyes Jr., secretary general of the left-leaning social organisation Bayan, said the upgrade was ‘meaningless’ as far as the poor were concerned. “It will not necessarily generate jobs and lead to sustainable growth,” he said. “It looks good only on paper and will only benefit big business. Expect Aquino to milk this for the 2013 elections.”

Recent developments in the southern Philippines, moreover, have highlighted the differences between the prosperous and peaceful north and the impoverished and unstable south. In February, gunmen from the southern Philippines caused a major security crisis in Malaysia when they took over an isolated village in the state of Sabah. Aquino has faced significant domestic criticism of his handling of the crisis.

Richard Foyston, the chairman of Navis Capital, which is based in Kuala Lumpur and has about $3 billion in shares and private equity investments in Southeast Asia, cautioned that the Philippines’ economy remained highly dependent on household spending and on remittances from Filipinos working abroad.

Household spending makes up a big proportion of the Philippines’ economy because spending on infrastructure and industry has for years lagged behind the country’s peers in Southeast Asia. Remittances, meanwhile, rose 6.3 per cent to $21.4 billion last year, the equivalent of 8 per cent of gross domestic product.

“That fills a gap, but it is a sign of an imbalance,” Foyston said, referring to the remittances. “The capability and talent and willingness to work and invest, all those things that are good for an economy, have not been put to work at home in the Philippines.”

In May, elections will be held in the two houses of the Philippine legislature. Aquino, who is not up for re-election, has campaigned aggressively for his legislative allies, who are crucial for continuing his reform agenda.