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Fitch and Moody’s: Qualified Rating Actions

It’s most interesting juxtaposition between the varied accounts and perspectives on the pandemic and the Authorities’ optimistic view of the Philippine economy this year and the next. We saw this in the last few days splashed all over the broadsheets, with both citing factual basis but pointing perhaps to some qualified conclusion.

Are we looking at a classic example of clustering illusion?

Last Tuesday, Jan. 12, the broadsheets reported that Fitch affirmed the Philippines’ long-term foreign currency issuer default rating at triple B with a stable outlook. A country with a triple B rating in Fitch methodology is of “good credit quality.” It indicates “that expectations of default risk are currently low.” As such, the Philippines is considered to have the capacity to pay for its financial obligations. Given our painful experience with the pandemic, this is great for the Philippines.

Cited as main bases for this rating action were the country’s modest government debt levels and still strong growth prospects amid the coronavirus crisis. Expectedly, Fitch recognized that the impact of the pandemic on growth was more significant than their initial projection. The infection rate was higher and public health policy response was deemed broadly inadequate.

As a debt watcher, Fitch was correct to raise the potential risk of a delay in vaccine procurement and administration especially in the face of expected surge in transmission following the holiday season and the mass gathering in Quiapo. The most recent detection here of the UK variant of the SARS-CoV-2 virus should add greater urgency to stronger public health policy. Other factors could pull down the growth prospects including the presidential elections in May 2022 and the Supreme Court ruling mandating the National Government (NG) to pay up arrears and increase revenue allotments to local government units.

Policy-wise, the fiscal authorities affirmed their commitment to prudent fiscal and debt management to help revive the economy. The point, to them, is to restore both business and consumer confidence.

This is a welcome affirmation because, as Fitch stressed, weaker growth translates into lower public revenues and weaker capacity to undertake public infrastructure programs and sustain anti-pandemic measures. Public spending is compensatory to anemic consumption expenditure and decline in net income from abroad.

The central bank, on the other hand, focused on its early response to the pandemic in order to “signal to the market that we were ready to act swiftly and decisively to buoy market confidence, as well as to ensure sufficient liquidity and efficient functioning of the financial system.”

Fitch observed, however, that the Bangko Sentral ng Pilipinas (BSP) today has limited monetary space because the key policy rate is now below the 2.6% average inflation in 2020 and forecasts for inflation for both 2021 and 2022. The BSP was correct in acting promptly but may have to rethink its ultra-easy monetary policy. Growth in bank loans remains lethargic.

We see the same narrative of Moody’s as reported by the broadsheets the following day, Wednesday, Jan. 13. If Fitch was quite optimistic about its growth expectation for 2020 at minus 8.5%, the lower end of the NG’s minus 8.5-9.5% forecast, Moody’s was less optimistic at minus 8.7%. But Moody’s 2021 growth projection was right at the midpoint of the Development Budget Coordination Committee’s (DBCC) 6.5-7.5% growth prospects for this year compared with Fitch’s 6.9%.

But there is an identical qualifier. “Continuing pandemic-related constraints inhibit a complete recovery to 2019 output levels in 2021, despite our projection of relatively rapid real GDP growth.”

I share the view of both debt watchers that the key to economic bounce back in the Philippines and the rest of the Asia Pacific region is policy effectiveness against the pandemic. Without safeguards, opening the economy and encouraging people to go out and spend are just plain irresponsible.

What is the scenario out there?

Vaccination of the population will take time to cover a critical mass of both the population and the regional areas. Final talks are yet to be closed by the NG with vaccine makers such that the rollout is expected to happen in February. Against our population of more than 108 million, only 40 million doses will be available by then.

In fact, some members of the Philippine Senate are sceptical about the ability of the NG to fulfill its target of ordering 148 million doses of the coronavirus vaccines by year-end. The basis of minority leader Senator Frank Drilon, for instance, is that up until today, no emergency use authorization to any vaccine of any brand has been issued. On top of that, only part of the money to buy the vaccines is available. Administering the vaccines is another problem because of the people’s hesitancy to get the jab.

If local governments units (LGUs) and private corporations remain outside the perimeter of authorized parties to source the vaccines, it would be an enormous challenge to achieve herd immunity and restore business and consumer confidence. If the tripartite partnership among the NG, the LGUs/private corporations, and pharmaceutical companies can be streamlined by some protocols, and devolved, the faster we shall be able to overcome these issues.

The numbers have it. Cabinet Secretary Karlo Nograles recently announced that the Government has allocated P75 billion for the purchase of the vaccines. That would be good for around 57 million Filipinos. An additional 13 million, or a total of 70 million Filipinos, will get the vaccines if the sourcing by LGUs and private companies is factored in.

But what about the rest of us?

It would help us all if the Government at this point makes its vaccination policy — from sourcing to distribution — transparent. Access should be defined in an inclusive way. By all means, the Government should also define whether getting the jab is free or at cost. This is very critical to avoid confusion, perhaps riots, and discourage the emergence of a parallel market in vaccines. We cannot tolerate undue enrichment of some because of regulatory capture.

We have no time to lose. We are now behind some 42 countries that have started to vaccinate their citizens. The World Health Organization disclosed that of these early birds, 36 are high-income and the rest are middle-income countries. The UK with Pfizer was the first, with some boosters from its own AstraZeneca-Oxford University vaccine and Moderna. The European Union has also announced it has more than enough for its population. We used to deride the US for its infamous contribution to the rapid spread of the virus but mass vaccination is now in progress. The US was rather proactive in advancing billions of dollars to both Pfizer and Moderna while their vaccines were still being developed.

Looking ahead, what do we see?

From the BSP’s vantage point, “the worst is behind us. The recovery phase has begun.” This broadsheet actually supplied it with the eye-catching headline “remarkable rebound seen this year.” The BSP predicted a “solid” growth in the December quarter and “double-digit” growth in the second quarter of 2021. Policy-wise, the nation was assured that “the current policy is sufficient to carry us through” after the Philippines experienced its worst recession in many years.

This is not the first time we are hearing this optimistic commentary. An equally sanguine assessment of the “green shoots” in the third quarter was also made but the recession remained in double-digit territory. Unfortunately for us, many lagging and leading indicators have actually worsened since then.

The last easing by the BSP says it all. Despite the negative real policy rate, easing was continued because there must have been some fear the economy might fail to ascend from the recession.

And today, inflation rates here and abroad are rising. If growth perks up, and this is the pronouncement, domestic demand will begin to expand. No less than the Department of Finance flagged inflation risks from higher prices of food particularly vegetables and meat. Crude oil prices will not help because they are rising and are now exceeding $55 per barrel with output cuts by the Saudi-led OPEC and its allies.

Interest rates and money supply are definitely not the only games in town.

Like Fitch and Moody’s, I also see good prospects in our growth story. But I also see risks should we foul up our pandemic mitigation. Our people ought to know the limits of our exuberant optimism. Without vaccination reaching critical mass, our people might have to spend more time in lockdown, no country might admit them for work. Tourists would be discouraged to come. These images are repugnant to economic recovery.

But some of us might be seeing different shapes in the clouds, or “Face on Mars” instead of just mere rock formations.

Rolf Dobelli in argues that our brains do seek patterns and rules but seeing none, they could simply make some. This is a clustering illusion. We might therefore be seeing the economy’s impressive record of the last 20 years and projecting them into the next few years. The virus will not allow that if we fail to subdue it with massive vaccination.


Diwa C. Guinigundo is the former Deputy Governor for the Monetary and Economics Sector, the Bangko Sentral ng Pilipinas (BSP). He served the BSP for 41 years. In 2001-2003, he was Alternate Executive Director at the International Monetary Fund in Washington, DC. He is the senior pastor of the Fullness of Christ International Ministries in Mandaluyong.

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