Talk is rife about an impending credit ratings upgrade for the Philippines. The next round of upgrade will be the most significant one because it will bring Philippine debt to investment grade status, which basically means that ratings agencies think that credit risks are significantly reduced compared to before, when Philippine debt is considered “speculative” or below investment grade.
But how will this affect our personal finances? And what are ratings anyways?
First to answer the basic question of what ratings are. Credit ratings are opinions that are given by independent ratings agencies on the likelihood of a corporate or a government entity to default on its debt. There are three large global independent ratings agencies, and these are Standard & Poor’s, Moody’s and Fitch’s. These ratings firms started more than a century ago, to provide an independent risk analysis on large government and corporate projects that are looking for investments. Founders of ratings firm S&P saw that information is not freely and widely available to those who wish to invest in government and corporate capital expenditure projects. The solution that they come up with was to establish a credit rating firm that is independent of investors and corporations/governments to provide unbiased opinion on whether lending to an entity is risky or not.
Ratings on governments are referred to as sovereign ratings and each ratings agency has its own methodology of coming up with an opinion. There are many factors considered beyond economic numbers as risk is not always monetary in nature. This opinion is not a recommendation to invest or not but is rather an assessment of perceived risk relating to lending to a specific government. The ratings are often summarised into a letter grade ranging from AAA to D, AAA being the highest investment grade. The Philippines is currently one notch below investment grade and is expected to leave “speculative” status this year.
What does this mean for average Juan? The simplest answer is that it may mean easier, cheaper credit. I say may because the effect will not be felt directly by everyone, at least in the short-term. The ratings will affect directly the investors – those who invest in Philippine government bonds, and the borrower, i.e. the government of the Philippines. It is expected that a credit upgrade from speculative to investment-grade will mean that it will be a lot easier for the government to borrow money. Not that this is not already happening. An “investment-grade” status helps convince more institutional investors to purchase government bonds. As it is, bond issuances of the government has always been oversubscribed, which means that there is higher demand than what the government intended to borrow. At the same time, it will make borrowing cheaper by way of lower interest rates. Interest rates take into account the risks associated with an investment. Since the upgrade basically means that risks are reduced, then the government can reduce the interest rates of its debt, making borrowing a lot cheaper. Also, with the expected increase in the demand, the government will be in the position to lower interest rates even more.
If you’re planning to invest in government securities such as bonds, this means that returns from interest will be lower, but your investment will be much more liquid as there will be a bigger market for it. This is a good thing, as you don’t want to get stuck with a certificate that no one would buy. In the long term, it is expected that business loans and personal loans will be a lot more cheaper, as there will be an increase in funding liquidity. Although all of this will be dependent on the monetary policy that will be adopted by the Bangko Sentral ng Pilipinas (BSP). In short we’ll have to wait and see.
In summary, a credit ratings upgrade will be good in general, and will benefit everyone in the long-term, as long as it is coupled with sound monetary policy as implemented by our financial regulators.
For more information on credit ratings, visit http://www.understandingratings.com
Manila Finance Guy 