Economic Press Briefing | May 8, 2019
Friends in the media, good afternoon.
Just last week, the Philippines received some piece of good news in the form of a credit rating upgrade. Standard & Poor’s Global, one of the world’s most reputable credit rating agencies, raised the Philippines’ credit rating from BBB to BBB Plus with a stable outlook. This is the best rating the country has ever achieved.
Let me explain how this credit rating upgrade will contribute to achieving and sustaining our upper middle-income country status.
Credit ratings reflect the ability of a country to manage and pay back its debt. Standard & Poor’s upgrade last week indicates that the Philippine government has further improved on its ability to pay back its long-term debt.
A higher investment grade credit rating also signals to international investors that the Philippines is now a more attractive investment destination. The result is that investors will require lower rates of interest and returns for Philippine bonds and stocks, making financing cheaper for us. The private sector can also more easily and affordably tap international sources of funding when they borrow from overseas sources. The upgrade is a “green light” to invest more in our fast-growing economy.
More foreign direct investments means more jobs, increased productivity and higher incomes for our people. Foreign direct investments will help us sustain our rapid growth and make it more inclusive.
The Philippines received its first credit rating in 1993, under former President Fidel V. Ramos. The Double B minus rating received back then was below investment grade, indicating that investing in the Philippines was very risky.
You will also see in the chart that while credit ratings can improve as they did under the terms of former Presidents Ramos and Estrada, they can also go down as they did under former President Arroyo’s term.
The Philippines’ credit rating reached investment grade for the first time in May 2013 with a Triple B minus rating. This was followed by another upgrade in May 2014 to Triple B, which reflects a relatively good ability to meet our obligations.
The Philippines remained at Triple B for the next five years, until a week ago, when we received a BBB plus rating with a stable outlook from S&P.
This higher investment grade rating is just one step away from the sterling “A” rating territory.
This is a definitive win for the Duterte administration. The Philippines has grown at an impressively rapid rate over the past decade, outpacing many countries, and S&P believes that we will continue to achieve above-average growth.
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.
S&P also noted in its report that the tax reform program has increased our ability to fund public investments with less reliance on borrowing. When we do borrow, we prioritize official development assistance or ODA as it is cheaper and has longer terms of repayment as opposed to borrowing from private capital markets.
S&P expressed confidence in the government’s quick and decisive steps to tame inflation when it temporarily spiked last year. As a result of the government’s swift action, the inflation rate began to decelerate in January and further slowed down to only 3 percent in April, which is well within our target.
The current account deficit was also viewed by S&P as a positive development, since it is largely “investment-driven.” This is due to an increase in imported machinery and equipment for use in the Build, Build, Build program.
The international debt watcher also cited our young, educated, and skilled workforce as one of the Philippines’ competitive advantages. This is almost certainly why services exports continue to boost our economy. It is a virtuous cycle, and we should sustain investments in education and healthcare to make sure that we reap the maximum benefits of our competitive edge.
Following the success of the TRAIN Law in lowering personal income taxes and bolstering revenues, the passage of the TRABAHO bill and other tax reform packages will complete the process of making our tax system fairer, simpler, and more efficient.
To further strengthen the economy and increase institutional effectiveness, S&P also noted the importance of ensuring the timely approval of subsequent budgets. Moreover, increased participation in the capital markets, which the Bangko Sentral ng Pilipinas and the Bureau of Treasury have made a priority, is seen as a very positive signal.
Generally, S&P is telling us that we need to continue strengthening governance, policy, and reform measures.
The upgrade puts the Philippines above countries like Italy and Portugal, and just a notch below countries like Spain and Malaysia. Italy and Portugal rank below us because of their heavy debt burdens relative to the size of their economies and weak external financial positions.
It is important to note that the 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.
The credit rating upgrade is a direct result of President’s choosing to invest his political capital wisely in difficult but game-changing reforms such as the TRAIN Law and the Rice Tariffication Act.
Even when critics were noisy, President Duterte chose to throw his full support behind meaningful reform because it would benefit the Filipino people. For this, we also recognize the efforts of the House and Senate in passing thecritical legislation, particularly legislators like Former Speaker Alvarez, Congressmen Fariñas and Cua, as well as Senators Pimentel, Villar, and Angara.
I want to emphasize that we did not pursue these 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 law-abiding Filipinos.
President Duterte’s wise investment of political capital has not only been beneficial to the country. Now, the administration has more political capital with which to continue its reform agenda. Sustained high approval ratings are complemented by credible, third party affirmations of the President’s decisions, such as that of S&P.
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 in the near future.
Thank you very much.