Possible downgrade in credit rating next year? Too afraid of rating agencies?
The tax debt has sparked some controversy over whether our economic managers are obsessed with the country’s credit rating and skimping on funds used to alleviate our pandemic and economic woes.
The Philippine government debt stood at 11.6 trillion pesos as of July 31 of this year. The Treasury Office expects it to be around 11.730 billion pesos, or about 51.88% of gross domestic product, by the end of the year. This is an increase from 37% of GDP in 2019 (before the pandemic) and 47% in 2020 (in the first year of the pandemic). The Treasury Office predicts that the Philippine debt will reach 13.41 trillion pesos next year (2022), exceeding the important threshold of 60% of GDP. This traditional threshold warns that the more it increases from 60%, the greater the risk of default. This is why the government is trying to slow down the debt by 20%.
Well-known economists (Professors Emmanuel de Dios, Solita Monsod and Josef Yap) in a PCIJ article criticized the government for being stingy on essential borrowing and being too afraid of credit rating agencies.
First, as the professors have said, Philippine debt is 70% domestic debt and does not contain much currency risk. May I also add that the terms of multilateral loans are long term (15 to 25 years), so they do not pose an immediate threat in the early years of recovery.
Do rating agencies and foreign banks scare us?
In early 2021, Fitch and S&P had decided not to impose credit downgrades in 2021 and not to start until 2022.
But on July 12 of this year, when the Delta Variant wave just started here, Fitch gave us a “negative outlook” on our external debt, citing:
a) lower medium-term growth due to “scar effects”. It is the effects of long periods of unemployment that would lead to decreased physical and mental health, higher stress and lower well-being. This, in turn, will lead to lower wages and lower chances of finding a job later in life.
b) “the challenges associated with unwinding extraordinary stimulus measures and restoring public finances” (to use the exact words of Fitch Rating).
Recently, international bank ING ran an article that interpreted Fitch’s negative outlook warnings in the Philippines and Indonesia as perhaps the first in a series that will slowly reduce confidence in those economies. The final credit downgrade in 2022, if it occurs, could lead to massive sales. ING says that if the Philippines does not improve, a credit downgrade could take place in July 2022.
One positive thing that will help our debt situation is the $ 2.8 billion in Special Drawing Rights (SDRs), which the International Monetary Fund has allocated to us out of the total of $ 650 billion it has distributed to countries. world in August 2021. The $ 650 billion billion is the IMF’s largest disbursement and aid to countries in the world, this time to help during the pandemic – as a source of finance and part of foreign exchange reserves.
The SDR disbursement was suggested by economists Joseph Stiglitz and Jayati Ghosh when the pandemic erupted in early 2020. It took some time for the IMF to implement the plan.
Lack of international cooperation in funding
Many progressive economists, such as Carmen Reinhart and Kenneth Rogoff, have gone much further and have suggested that during this severe pandemic period, a temporary moratorium on external debt payments be granted to sovereign debts. This includes debts to multilateral lenders, sovereign creditors and private investors. This has not happened, perhaps because many developed countries are also under attack from Covid outbreaks. But an initiative to help really hard-hit developing countries (like ours) must start to take shape as soon as the Covid situation worsens in the second half of this year.
Integrity and responsibility
This brings me to the most important point. Our economic officials have been fairly cautious in borrowing funds to address the health and economic challenges that this pandemic has brought. But today, there appear to be strong indications that pandemic funds have been used abnormally for the benefit of people and businesses close to senior government officials. If this is true, it has also led to declining finances and overpriced medical supplies for the fight against Covid. This not only betrays the goodwill of the people, but can be used by credit agencies as an excuse to degrade the credit of the Philippines due to deteriorating governance as well as an abnormal use of borrowed budget funds. Thus, a very thorough and complete investigation of these cases should be a priority.
Dr. Joseph Anthony Y. Lim is Professor of Economics at Ateneo de Manila University.