Of credit ratings - how a taxpayer may see them

Of Credit Ratings–How A Taxpayer May See Them was first published on May 13, 2019. Photo credit above: Corporate Finance Institute.

It was good news for the Philippines—and words of commendation are in order for its economic managers—when Standard & Poor’s (S&P) raised the country’s credit rating a notch from “BBB” to “BBB+” the other week.

The closest meaning lay people may think about a credit rating is ability to pay—that is, a higher credit rating means a greater ability to pay. Credit ratings can go as high as Triple A (AAA) or as low as D. (For S&P, a bond is considered investment grade if its credit rating is BBB- or higher. Bonds rated BB+ and below are considered to be speculative grade, sometimes also referred to as “junk” bonds).

A credit rating is like an educated tsismis—if there is one such a thing—about you and a credit rating agency is like your tsismoso neighbor. When your neighbor talks glowingly about you, many of your neighbors can become your friends or allies. Even the itinerant Bombay (call me Tony, not Bombay, says an Indian national), will be happy to lend you money should an emergency need for it arise.

On the other hand, if your neighbor is not impressed, then chances are you will not get any help—especially on money matters—from the rest of your neighbors when you need one. Tony will likely ignore you.

When this happens, and you are in need of cash, you will entice Tony with a promise to pay a loan at a higher-than-average interest rate, say 25 percent instead 20 percent for a period of one month. If this does not work, you will probably offer more, say 30 percent, or look for creditors outside of the immediate neighborhood just to raise the funds you need.

The same thing can happen to a country (or a sovereign) or to a private company that needs extra cash. When a country like ours spends more than it earns (we have been on deficit spending for as long as one can remember) it needs to borrow money. But when it has a good credit rating (like the one we have now), creditors (or investors) are easy to find.

This means we need not pay for interest and/or discounts (cost of borrowed money) at rates higher than what creditors offer in the market just to be able to cope with the budget deficit. Competition can further bring cost of borrowings down, which is what government achieves when it conducts public auction (every Monday and Tuesday) for Treasury Bills and Bonds. Proceeds from these auctions constitute the total amount of national government (NG) debt, recorded at Php5.2 trillion as of March 2019. This amount represents 67 percent of total NG debt; the rest, at 33 percent of total, comprises external debt.

Because positive conditions can be established when government pays less for its borrowings, a credit rating upgrade will always be a boon for taxpayers. When funds become readily available, government is able to push its development agenda, boosting its capacity to deliver social services and much-needed infrastructures.

S&P pointed out that the rating upgrade reflected “the Philippines’ strong economic growth trajectory, which we expect to continue to drive constructive development outcomes and underpin broader credit metrics over the medium term … The rating is also supported by solid government fiscal accounts, low public indebtedness, and the economy’s sound external settings.”

The taxpaying public may interpret this as (1) the Philippine economy is expected to continue to grow at its current 5-year average rate (GDP growth rate was recorded at 5.6 for first quarter of 2019, (2) government will be able to carry on with its fiscal reforms, (3) maintain debt-to-GDP ratio (now at 44 percent) at sustainable levels, and (4) diaspora surplus (mainly OFW remittances) maintains a strong impact on local investment and consumption levels.

The country’s economic managers are quick to claim credit for the upgrade. They, along with those who preceded them, deserve it.

Finance Secretary Carlos Dominguez III said the upgrade recognized “President Duterte’s strong leadership and his 10-point economic program.” Bangko Sentral ng Pilipinas Governor Benjamin Diokno said the upgrade showed that the administration’s economic team “is working in the right direction.”

Some people have questioned the infallibility of credit ratings. In 2011, the US government denounced S&P when the latter downgraded its sovereign rating from Triple A to AA+. In the same year, Portugal described Moody’s “junk” rating as “based more on opinion than evidence.”

Credit rating agencies come in droves, but only two of them—Moody’s and S&P—already controls 80 percent of credit ratings market. One of the “big three”—Fitch—controls another 15 percent.


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