"We are mere mortals and they are the international agencies that rate the creditworthiness of sovereign and private borrowers."
"We are mere mortals and they are the international agencies that rate the creditworthiness of sovereign and private borrowers."
The international credit rating agencies belong to a class of institutions whose judgments and opinions are supposed to be accepted without question by governments and financial communities. The upgrade and downgrade judgments that those agencies—S&P Global Ratings, Moody’s Investor Services and the Fitch Group—make and the reasons that they present in support of those judgments, are supposed to be regarded by governments and financial communities virtually like the tablets with which Moses came down from the mountain. After all, we are mere mortals and they are the international agencies that rate the creditworthiness of sovereign and private borrowers.
Should everything that emanates from S&P, Moody’s and Fitch be accorded the status of Gospel truth? Should they—judgments, opinions and analyses—be accepted in unquestioning fashion? Or ought they to be subjected to scrutiny and, if need be, challenge?
Clearly, the judgments of the Big Three of international credit rating do not possess the status of Gospel truth and should not be accepted unquestioningly. Case in point is the most recent S&P judgment on the credit rating on the Philippines—the sovereign credit rating, in international financial parlance.
A few weeks ago, April 30, S&P decided to raise the long-term credit rating of the Philippines one notch—to BBB+ from BBB, with stable outlook. That has placed this country within striking distance of an A-1 rating. A-1 rating is the first step along the road to an AAA rating, which is the highest in the international credit rating system.
S&P cited three factors in its decision to upgrade the long-term Philippine credit rating to BBB+. These were (1) a healthy external position, (2) sustainable public finances and (3) above-average economic growth. S&P said that its stable-outlook assessment “reflected its assumption that the Philippine economy would continue to achieve above-average real GDP growth over the medium term, supporting the sovereign credit profile.” S&P further stated that it attaches great importance to three factors in deciding whether to revise a country’s credit rating or to not revise it. These are “significant further achievements in … fiscal reforms”, a country’s “status as a net external creditor (becoming more secure)” and a country’s “international settings’ (improving) marketing.”
This brings me back to the issue of the treatment that is generally accorded to the judgments and opinions of the international credit rating agencies. The latest S&P judgment on this country’s long-term credit rating was naturally—and predictably—accepted without any negative comment. While I, a Filipino, am very pleased about the resulting lowering of the cost of Philippine borrowing in the international financial markets, I am not at all sure that this country’s long-term credit rating merits an upgrade at this time. The rating should have been kept at BBB for now, in my view.
The fact is that, since the day on which S&P upgraded the Philippines’ long-term credit rating to BBB, there has been no significant positive change in any of the three areas that S&P considers essential to any decision to upgrade or downgrade a long-term sovereign credit rating. For starters, this country’s “institutional settings” have not improved markedly; the shifts that have taken place in Philippine external relations and the proposed changes in the nation’s governmental structure have created a climate of uncertainty and hesitancy among international organizations, foreign governments and investors. The Duterte administrations’ reliance on excise tax increases strengthen the public finances have, predictably, ignited inflationary fires and social unrest. And the stepped-up foreign borrowing to help finance the Build-Build-Build infrastructure program, undertaken within the context of a fragile balance of payments, has prevented the securing of the Philippines’ status as a net external creditor.
One gets the impression that the international credit rating agencies concentrate on the state and prospects of financial blows and take little account of the serious shortcomings and flaws in the real economy that gives rise to such flows. These shortcomings and flaws include an inefficient agriculture (2018 growth: a miniscule 0.6%), a chronically imbalanced external trade (first quarter 2019 deficit: $9.8 billion) and an equally chronic failure to attract sufficient FDI (foreign direct investment). The rating-agency analyses that accompany the changes in sovereign credit ratings have little to say about the impact of such shortcomings and flaws on the current and future performances of the credit-rated economies. The latest S&P upgrade of the Philippines’ long-term credit rating is no exception to this state of affairs.
In sum, the judgments and pronouncements of the international credit rating agencies need to be subjected to examination closer than that which they have accustomed to receive. Failure to do so is unhealthy.