Parsing Fitch

The critics of the Philippines ate another bite of hat the other day when the Fitch Rating Agency upgraded Philippine debt to investment grade. Discussion threads on the upgrade were again the habitat of the 100 percenters, broken down about 80/20, with 80% offering commendations and full credit to President Aquino, and 20% claiming all credit should flow to Gloria Arroyo.

Largely missing were the voices of reason that say, sure, Ms. Arroyo can claim some credit for things like VAT, but the rating would not be raised if it weren't for Mr. Aquino's good governance agenda and fiscal management. Furthermore, some aspects, like steady OFW inflows, belong to no one but OFW's.

Like, where's the ANALYSIS instead of the need to win arguments?

Well, Joe's got it.

He took apart the Fitch statement announcing the rating upgrade piece by piece. The full statement is provided after this commentary. Here are Joe's findings:

1. Fitch places the Philippines at the bottom of the investment-grade category of ratings. There is a long way to go to reach top. Key point: work is not done.
2. Cash flows compare well with other countries thanks to strong OFW inflows. Imports are expected to increase with net flows remaining healthy through 2014. Key point:  The ratings look SIDEWAYS at other countries and AHEAD at what might happen; the Philippines compares favorably, in the main, with other peer nations, and the future looks stable.
3. The economy is strongly driven by domestic demand. Key point: growth is not driven by manufacturing or exports or government infrastructure spending.
4. Improvements in fiscal management have made debt resilient to shocks. This is a combination of good GDP growth with good debt management. Key point: Fitch explicitly attributes the START of this to President Arroyo.  Obviously, President Aquino has built on the foundation.
5. The macro-economic condition is sound. Inflation is favorable to peer nations. Key point: BSP (the central bank) is doing good work.
6. Governance is still weak compared to peers.  Key point: President Aquino is explicitly credited with improvements, but the Philippines is still seen as having governance problems.
7. Family income and living conditions in the Philippines are below peers. Key point: Way below. Poverty is an economic risk.
8. Philippine tax revenues are weak compared to peers. Key point: It is hard to extract blood from a turnip. Or taxes from a bazillion poor people.
9. The Philippines can realize further ratings improvements by continuing to grow GDP while broadening the tax base. Ratings could go back down if governance deteriorates or financial integrity slips. Key point: Pause to appreciate the achievement. Then get back to work. Aquino's "collect more earned taxes" initiative is sound.
10. The ratings assume: (a) good governance continues, (b) economic growth remains a little better than 5% per year, and (c ) there are no unexpected shocks. Key point: Pray.

The Philippines is looking good. The current administration should be rightfully proud of this achievement. So should OFW's and those of us supporting the economy by spending our income as soon as it comes in. Like, about EVERYONE I know.

Those who offer up sniping criticisms to take away pride in the occasion are small of mind and heart. This is a very notable and worthy achievement. By the Philippines. Period.

Now, y'all kindly get out there and keep earning and spending. Obey the laws, pay your taxes, be kind to your neighbor, support your nation.

Hi'yup!

Fitch Statement: March 27 (Organized in outline form by the editor for clarity)

• Fitch Ratings upgraded the Philippines' Long-Term Foreign-Currency Issuer Default Rating (IDR) to 'BBB-' from 'BB+'. The Long-Term Local-Currency IDR has been upgraded to 'BBB' from 'BBB-'. The Outlooks on both ratings are Stable.
• The agency has also upgraded the Country Ceiling to 'BBB' from 'BBB-' and the Short-Term Foreign-Currency IDR to 'F3' from 'B'.
• Key Rating Drivers . The upgrade of Philippines' sovereign ratings reflects the following factors:
• The Philippines' sovereign external balance sheet is considered strong relative to 'A' range peers, let alone 'BB' and 'BBB' category medians. A persistent current account surplus (CAS), underpinned by remittance inflows, has led to the emergence of a net external creditor position worth 12% of GDP by end-2012, up from 6% at end-2010. Remittance inflows were worth 8% of GDP in 2012 and proved resilient even through the shock of the global financial crisis. Fitch expects a rising import bill stemming from strong domestic demand to lead to a narrower CAS and to stabilise the net external creditor position at a strong level through to 2014.
• The Philippine economy has been resilient, expanding 6.6% in 2012 amid a weak global economic backdrop. Strong domestic demand drove this outturn. Fitch expects GDP growth of 5.5% in 2013. The Philippines has experienced stronger and less volatile growth than its 'BBB' peers over the past five years.
• Improvements in fiscal management begun under President Arroyo have made general government debt dynamics more resilient to shocks. Strong economic growth and moderate budget deficits have brought the general government (GG) debt/GDP ratio in line with the 'BBB' median. The sovereign has taken advantage of generally favourable funding conditions to lengthen the average maturity of GG debt to 10.7 years by end-2012 from 6.6 years at end-2008. The foreign currency share of GG debt has fallen to 47% from 53% over the same period.
• Favourable macroeconomic outturns have been supported in Fitch's view by a strong policy-making framework. Bangko Sentral ng Pilipinas' (BSP) inflation management track record and proactive use of macro-prudential measures to limit the potential emergence of macroeconomic and financial imbalances is supportive of the credit profile. Inflation has been in line with 'BBB' peers on average over the past five years.
• Governance standards, as measured in international indices such as the World Bank's framework, remain weaker than 'BBB' range norms but are not inconsistent with a 'BBB-' rating as a number of sovereigns in this rating category fare worse than the Philippines. Governance reform has been a centrepiece of the Aquino administration's policy efforts. Entrenching these reforms by 2016 is a policy priority of the government.
• The Philippines' average income is low (USD2,600 versus 'BBB' range median of USD10,300 in 2012), although this measure does not account directly for the significant support to living standards from remittance inflows. The country's level of human development (as measured in the United Nations Development Programme's index) is less of an outlier against 'BBB' range peers.
• The Philippines had a low fiscal revenue take of 18.3% of GDP in 2012, compared with a 'BBB' range median of 32.3%. This limits the fiscal scope to achieve the government's ambition of raising public investment. The recent introduction of a "sin tax", against stiff political opposition, will likely lead to some increment in revenues and underlines the administration's commitment to strengthening the revenue base.

• Rating Sensitivities.
• The main factors that could lead to a positive rating action, individually or collectively, are:
• Sustained strong GDP growth that narrows income and development differentials with 'BBB' range peers. An uplift in the investment rate that enhances growth prospects without the emergence of macroeconomic imbalances.
• Broadening of the fiscal revenue base, as well as further improvements in the structure of the Philippine sovereign debt stock.
•  The main factors that could lead to a negative rating action, individually or collectively, are:
• A reversal of reform measures and deterioration in governance standards.
• Sustained fiscal slippage, leading to a higher fiscal debt burden.
• Deterioration in monetary policy management that allows the economy to overheat.
• Instability in the banking sector, leading to a crystallisation of contingent liabilities on the sovereign balance sheet.

• Key Assumptions .The ratings and Outlooks are sensitive to a number of assumptions.
• The agency assumes the Aquino administration will persist with its fiscal, governance and social reform agenda.
• Fitch estimates trend GDP growth for the Philippines in a range of 5%-5.5%.
• The ratings incorporate an assumption that the Philippines is not hit by a severe economic or financial shock sufficient to cause a significant contraction in GDP and trigger stress in the financial system.
• Fitch assumes that there is no materialisation of severe risks to global financial stability that could impact emerging market economies, such as a breakup of the euro zone or a severe economic crisis in China.