Fitch Ratings upgrade: Will the Philippines’ new ‘investment grade’ status spell good times ahead?

In John Landis’s 1983 hit movie Trading Places, Billy Ray Valentine, a bum and hustler played by Eddie Murphy is picked up from the streets, cleaned up and dressed in an expensive business suit as part of an experiment instigated by wealthy brothers Randolph Duke and Mortimer Duke. The made-over Valentine is then set up in their firm Duke & Duke and introduced to his new colleagues as an up-and-coming hotshot trader.

Ordinary Filipinos are elated by the Fitch Ratings upgrade!
Ordinary Filipinos are elated by the Fitch Ratings upgrade!
As the film unfolds, the success of Valentine’s makeover quickly becomes evident. He starts out looking like a million dollars with his newly-manicured looks and power suit, then proceeds to step up and actually perform like a million dollars.

Fast forward 30 years later. Top-tier rating agency Fitch Ratings recently awarded the Philippines an investment-grade credit rating paving the way for the country’s improved access to a windfall of capital, presumably to fund further economic growth.

“This means much more than lower interest rates on our debt and more investors buying our securities,” Mr. Aquino said in a statement. “This is an institutional affirmation of our good governance agenda: Sound fiscal management and integrity-based leadership has led to a resurgent economy in the face of uncertainties in the global arena. It serves to encourage even greater interest and investments in our country.”

Fitch Ratings cited “improvements in fiscal management” begun under Mr. Aquino’s predecessor, Gloria Macapagal Arroyo, as one of the reasons for its decision to lift the Philippines’ rating from junk status, increasing it one notch, to BBB- from BB+. The rating applies to the country’s long-term debt denominated in foreign currency.

What this means is that Philippine businesses now have access to cheaper overseas foreign-currency-denominated loans. And with the peso rapidly appreciating, this is not a bad deal. Low interest rates combined with a depreciating principal means good times ahead.

Or does it?

Access to cheap capital is a double-edged sword. Much like the way sugar- and caffeine-fortified “energy drinks” boost performance over the short run, cheap dollar-denominated loans are notorious for their addictiveness. This is exactly what happened in the 1990s in the lead up to the infamous currency crash of 1997. The Philippines in the early 90s was awash with cash. The stock market was soaring, “blue-chip” IPOs were being hawked to starry-eyed “investors” by every “investment banker” and her dog, ordinary schmoes hit with the “wealth effect” bug were pouring excess highly-leveraged cash into real estate.

Then in 1997, the market tanked.

After Thailand ran out of money to fund the Thai baht’s peg to the US dollar, its Central Bank was forced to float its currency which, as expected, fell in value versus the greenback. The crash of the Thai baht quickly rippled across Asia, but the seeds for what was to become the Asian Currency Crisis of 1997 had already been planted long before. At the time, Thailand had acquired a burden of foreign debt that made the country effectively bankrupt even before the collapse of its currency. As the crisis spread, most of Southeast Asia and Japan saw slumping currencies, devalued stock markets and other asset prices, and a precipitous rise in private debt.

As local currency values plummeted local firms all over southeast Asia holding foreign US-dollar loans effectively saw their debt burden double and even triple. When you are stuck with a business that is earning in pesos while owing in dollars, you’re pretty much toast.

If we think being given a big piggybank full of money to “invest” will necessarily result in sustainable development, we should think again. In 1994, economist Paul Krugman published an article attacking the idea of an “Asian economic miracle”. He argued that East Asia’s economic growth had historically been the result of increasing the level of investment in capital. However, total factor productivity had increased only marginally or not at all. Krugman argued that only growth in total factor productivity, and not capital investment, could lead to long-term prosperity. Krugman himself has admitted that he had not predicted the crisis nor foreseen its depth.

The causes of the debacle are many and disputed. Thailand’s economy developed into a bubble fueled by “hot money”. More and more was required as the size of the bubble grew. The same type of situation happened in Malaysia, and Indonesia, which had the added complication of what was called “crony capitalism”.

Most people will agree that capital allocation in the Philippines is largely controlled by a small clique of wealthy oligarchs. Indeed, the Aquino-Cojuangco feudal clan is not just one such but one of the biggest of them all. So just on that alone, the manner and fairness with which any increased capital inflow into the Philippines will be channeled remains an iffy proposition. Will capital be channeled to the most deserving business proposition? Or will it be funneled into the portfolios of the most well-connected oligarchs?

But less-understood is the fundamental weakness of the capital base of the Philippines. Most “investments” in the Philippines are on highly speculative “assets” that do not contribute to real increased productivity (the ability to increase the efficiency with which we make and maket tangible stuff) that is enabled by a fixed tangible capital base (robust indigenous technological capability, stable manufacturing capacity, and a workforce equipped with the most relevant skills) — which is why despite reports of “healthy” rates of increase in the country’s “gross domestic product” (GDP), employment remains flat (and OFWism continues to gallop ahead), and per capita income remains at wretched levels.

Indeed, the Philippines remains that quintessential society of “educated hard workers” that remains impoverished and utterly vulnerable to economic forces and trends outside of its control.

When a society’s economic house is built on top of a sand dune of me-too approaches to business development, employment hinged upon capital created by entities not inherent or indigenous (in other words, external or foreign) to it, and ephemeral cost-plus commercial transactions, it is difficult to see a bottom in the event of economic collapse. There is no real equity at the core of such a society’s economic house of cards. There is nothing in the Philippines beyond the muscle of its workers that is worth buying. When demand for labour vanishes, Filipinos are left with virtually nothing. No world-class business assets and brands to sell, no safe and pleasant (much less interesting) cities and countrysides to offer to European and Japanese backpackers, no lush forests to pitch to researchers and eco-tourists, no world-class cutting-edge indigenous technology and scientific achievement to fall back to and build upon from scratch if necessary. Nothing.

Rather than build an asset base of people, infrastructure, knowledge and expertise, and culture of enduring value, Filipinos spent the better part of the last half-century harvesting its low-hanging assets and exporting them raw as stop-gap measures to prop up a mediocre economy. Much of what Filipinos take pride for in their country is its natural beauty. But that is rapidly being physically degraded as well as overlooked because of peace-and-order issues in the remaining viriginal parts of the archipelago. That leaves the human achievement component of the intrinsic value of the Philippine Nation. Not surprisingly, while Filipinos get heaps of kudos from their foreign employers (and themselves) for being such hard workers, not much can be said about the collective design and innovation faculties of the society. Unfortunately it is in the furnaces of design and innovation that Capital (with a big “C”) is ultimately forged.

Design-added-value results in creation of enduring value. Even in stillness, a truly valuable painting or literary work, for example, can keep a viewer transfixed, spellbound and reflective; offering a richness and depth that continuously reveals subtle aspects of itself with every additional hour spent exploring it. Its value is inherent and stored. Its value is capitalised — a finite amount of labour input resulting in an immeasurable quantity of value continuously delivered over a timescale that transcends the labours of its creator. On the other hand, labour-added-value is fleeting and volatile. The value it yields over time is dependent on a sustained effort. The need for said effort can easily disappear in one of those turns in fortunes that are notoriously impossible to forecast.

The Philippines’ is a labour-added-value economy. And it is the worst kind — a labour-added-value economy propped up by the remittances of a vast army of overseas workers.

It has no solid core no tangible capital base of consequence to collapse to in the event of that “market correction” that is always around the corner. In good times, the economic value sustained by commercial activity in most economies keeps peoples’ quality of life safely above the absolute poverty line. The inherent risk that is always present in labour-intensive economies becomes apparent in bad times.

Whereas a robust equity base in a well-capitalised economy helps keep its peoples’ heads above water in a depression, there is no such rock bottom in a labour-intensive economy. Like a super-massive star destined to collapse into a dimensionless black hole, economic collapse in a labour-intensive economy can plunge the majority of its population below absolute poverty into wretched levels of existence.

Will the Philippines live up to the new power business suit it’s been given by the world’s “credit rating” agencies the way Billy Ray Valentine did in Trading Places? Or will Filipinos merely rest upon the coming windfall of easy money and delegate their already deficited thinking faculties to the multinational firms that will likely make a beeline to cash in on Filipinos’ new-found perception of prosperity?

As always,

Abangan ang susunod na kabanata.

[NB: Parts of this article were lifted from the Wikipedia.org article “1997 Asian financial crisis” in a manner compliant to the terms stipulated in the Creative Commons Attribution-ShareAlike 3.0 Unported License that governs usage of content made available in this site.]

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benign0 is the Webmaster of GetRealPhilippines.com.

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40 Comments on "Fitch Ratings upgrade: Will the Philippines’ new ‘investment grade’ status spell good times ahead?"

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david
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“the rich get richer..the poor get the picture” Midnight Oil

Libertas
Guest

the government will
1. deny arroyo’s role in achieving tge upgrade, as very pointedly stated by fitch
2. use it as centrepiece in upcoming elections
3. miss the opportunity it could present
4. downplay its importance/ talk long term come 2016 and no benefits achieved
5. see an increase in wealth gap

Libertas
Guest

bloomberg review of upgrade.
will make little difference unless philippines changes culture and addresses underlying problems. ( already borrowing at investment grade rates)
infrastructure investment
inclusive growth
corruption levels
investor confidence
increase gdp growth
avoid bubbles in sectors – banking and property
innovation
manufacturing

david
Guest

Precisely. add to the above list: reduce bureaucratic red tape; overhaul legal system; reduce crime; implement and enforce more progressive tax system

Aegis-Judex
Guest

A more progressive tax system would not be good for the wealthy ones; indirectly punishing the rich for their wealth… I would go for a flat tax rate instead.

If you want to attract capital, you have to level the playing field, which as of the moment is heavily in favor of local oligarchs.

Johnny Saint
Guest
We already have the makings of a flat, broad based consumption tax rate. It’s called Value Added Tax (VAT). It’s similar to the European version of the VAT and the national sales tax currently being considered in the United States. If it does get implemented, a complementary reduction of the withholding tax and/or personal income tax should also be implemented. Under the implementation of the VAT, taxes are inherent in the production and distribution of goods and the provision of services. Collecting income tax and/or withholding tax will simply be a form of doubling the taxes imposed. In this case,… Read more »
Johnny Saint
Guest

Slight clarification:

Under a VAT-based system + reduced income tax/withholding tax

Capitalists and entrepreneurs would have more capital available to put back in the local economy. That will be the effect on the rich.

For regular working stiffs, less income tax and/or withholding tax means more cash in their pockets at the end of the day. More cash to spend on commercial activities such as the purchase of goods and services.

And that keeps the economy rolling.

Johnny Saint
Guest

“…enforce more progressive tax system.”

This usually translates to mean the more productive members of society are penalized by making them PAY for those who ARE NOT productive. There will be no incentive for the indolent to take up a profession if the government will simply tax those who contribute to the economy to give away services to those who do not work and rely on handouts.

david
Guest

Developed economies have progressive tax systems. Flatter tax regimes only perpetuate wealth staying with a few. Progressive doesn’t mean punishing. You need to consider the Marginal Propensity to Consume. This is particularly important in an economy like PH where you don’t have a large manufacturing sector. Hence: the wealthy tend to spend on imported products, real estate, overseas travel. It doesn’t actually do a lot for the economy.

Johnny Saint
Guest
Here are the real world effects of a progressive tax system: First off, it violates the principle of equality under the law. In a democratic society, all people are subject to the same laws of justice (due process). All are equal before the law. That also includes fairness in economics in regard to taxation and welfare. Specifically, equality refers to the EQUAL LIFE CHANCES regardless of identity, to provide all citizens (of the society) with a basic and equal minimum of income/goods/services or to increase funds and commitment for redistribution. Under progressive taxation, representation is out of proportion to the… Read more »
Glenn
Guest
@Johnny, EXACTLY where did you come up with the “the top 5% in most countries pay over half of all the taxes”, because that is absolutely not true. The wealthy ,for example in the USA, have so many tax loop-holes they can dodge taxes and end up paying 50%, percentage wise, less taxes than ‘working stiffs’. Even worse, people have this foggy notion that people on welfare(poor people) are gobbling up the tax dollars that could be better spent. BUT, in fact it is the very same tax-dodging corporations that are receiving tax-payer bailouts(corporate welfare) while paying no federal taxes… Read more »
Johnny Saint
Guest
Glenn, I’m assuming you are an American so I’m going to use data provided for the United States. The statistics for the US come from your own Internal Revenue Service (IRS) as quoted by the Wall Street Journal and various other sources such as the Office of Tax Analysis of the US Treasury Department and think tanks such as the Heritage Foundation and the National Taxpayers Union. For the record, the above reference to those paying a larger share of taxes having a greater say in elections is a thought experiment. Simply a demonstration of how inequitable the progressive tax… Read more »
Johnny Saint
Guest

Glenn,

You’ll also remember I did mention that the implementation of a progressive tax system seems to ENCOURAGE “creative accounting” and the use of tax loopholes. Which, in a way, I can appreciate because of the onerous nature of the tax system.

Johnny Saint
Guest

Glenn.

I suggest that before you cast aspersions laced with profanity at anyone that you verify your thousands of examples. It might make you look less stupid. Your passion might be forgivable if we were dealing with a five year old. But adult conversation rarely needs to descend to the excessive use of vulgar language.

Glenn
Guest

@ Johnny,I made one point,
I called you on a statement you made: IT IS FALSE. Was false when you made it and it still is.
Writing a long-winded, off-topic response will not make your original statement true. If anything, it will only make you appear even dumber.

Johnny Saint
Guest

Off topic? You’re now saying the statistics from the IRS are false? You didn’t dispute them. You cited ONE company that didn’t pay taxes, a fact I even acknowledged. Prove the IRS is lying. Prove your government is lying. The other facts I stated are there to emphasize that the progressive tax scheme doesn’t work and is inequitable. Especially when your president favors his rich friends over and above the majority of American taxpayers.

Glenn
Guest

@ Johnny, Listen to yourself…’So now your saying…’, NO NO NO, I did not say anything of the sort. You assume things then make un-founded accusations, and I do not have to prove anything. You are starting to sound delusional. The statement YOU made about ‘5% of the people’ was/is FALSE and is the only point I am making. I did not read anything you wrote past the point where you started with the insults. You made a false statement, got called on it…just get over it already… Holy Shit!
GOOD GOD MON, give it up!

Johnny Saint
Guest
Glenn, Are you incapable of comprehension? I explained where I got the IRS data showing the TOP 5% of US tax payers pay for OVER HALF THE TOTAL COLLECTED FEDERAL INCOME TAX. After you accused me of posting false information. Insisting you are correct doesn’t make your statement true. It just makes you come off like a two year old throwing a tantrum. PROVE TO THE READERS WHERE THE DATA I STATED IS INACCURATE. If it is erroneous I would like to know myself. Thus far all you have done is rant that I (and the IRS, apparently) are wrong.… Read more »
Glenn
Guest

@ Johnny, LOL! I made one point, ONE! It is YOU that is ranting and throwing tantrums with your 35 LONG-winded paragraphs of a response, WOWO! Hot Dang, you a mess Son.
It definitely appears you need some stronger meds from your DR..IDK, but maybe a handful of Prolixin will help?

Johnny Saint
Guest

And all Glenn has done is whine, cry and stamp his feet and toss around profanity. Still haven’t proven the statement I made was wrong. By your own admission you didn’t bother to read all the comments I posted. Because you already have an opinion that anything that you disagree with is wrong. That is the clinical definition of delusion.

Glenn
Guest
A basically good article, but the author makes a few basic mistakes as well as misses a few points about why this ‘investment grade’ rating MIGHT be a good thing. While this happens, and if it is sustained, mortgage interest rates will come down to tolerable levels, say……6-8% which will enable more OFW’s to actually buy a home in their homeland. The price of housing, new homes that is, should come down. BUT BUT BUT the filipino housing market is the strangest bird i’ve ever seen fly. How prices per sq. mtr.in a banana-republic 3rd world country can be higher… Read more »
Johnny Saint
Guest
The fact of the matter is a lot of FOREIGNERS are buying up condos in the Philippines. Not just the so-called “elite.” The more expensive high-end condo units in the reputable developments often sell faster. Many Hong Kong, Singapore and US citizens are buying condominiums here and this is what’s driving sales. With the local rich folk and foreign nationals buying up property, prices in the top subdivisions in Metro Manila and Cebu are appreciating beautifully. This renewed foreign interest in investing in the Philippines is creating a market for rentals. They’ve made installments and are expecting to get high… Read more »
Hyden Toro
Guest

Happy Easter to all!!!

Libertas
Guest

simeine should look closely at wage share as % of gdp.
in philippines it is 27.8%
that compares to most countries 42 – 48%.
i assume that reflects excessive company profits and static/low wages relative to product prices.
either way it shows the reason for the wealth gap and how any inclusive growth is an illusion.
it also shows how far behind the philippines is in social engineering and equality.

Glenn
Guest
The RP may be behind in the areas you mention but that is the way the western countries are starting to look. They have become like 3rd world,”Chinese Whore Houses” as wages have stagnated, the unions are a distant memory and the bankers have hollowed out the economies, especially Southern Europe. If the jobs had not all been taken out of the west and moved elsewhere, China/India/S.E.Asia, the western economies would be booming and Asia would still be an out-house.off-topic as it is, it is still mind-boggling how people in Asia will work for basically nothing and be glad to… Read more »
eduardo
Guest

of course, with pres aquino our country is going up.

Gogs
Member

Eduardo, the only thing going up is useless spending to make up for lack of accomplishment. It is all PR and no substance. Let’s start with your salary for example. Online trolls paid for out of my tax money. Get A Job.

Johnny Derp
Guest

Yep everything is going up
Prices,expenses,unemployment rate not to mention the growing discontentment of the people on your president’s obviously poor performance.
Troll Harder, faggot.

Ivan
Guest

I could not agree more.

I am not surprised at all with the high job approval rating of the president.

The bitter arroyo fanboys should just get over with it and get a life.

Ivan
Guest

And let me add that the impending HUGE win of the senatorial candidates in the administration slate this May will resemble the amount of trust and satisfaction the Filipino people have with the current administration.

Libertas
Guest

haha
only due to the crooks in comelec.
what a disgrace they are

StopDrinkingVirility
Guest

Lies. That’s because most of the Filipinos are dumb. That is all. And even high job approval ratings can be manipulated, so does surveys.

The bitter Yellow Zombies should get over with and get a life. We would never progress as a nation if we rely on such people like the senatorial candidates in the administration slate, including the president himself.

Libertas
Guest
In the philippines the combination of stolen money through corruption, wasted money through inefficiency, and ‘lost’ money through tax avoidance/non collection accounts for, and amounts to, approx 1 billion pesos a year – which is not spent on infrastructure, health, education etc and represents circ i.e. For every 100 pesos the government should be getting – It doesnt collect 20 pesos which it should It loses 25 pesos to corruption a 45% of govt budget. It wastes 10 pesos through inefficiency It spends 30 pesos on its own bureaucracy It leaves 10 pesos (10%) to spend on substandard projects –… Read more »
Glenn
Guest

Rank Amatuers? MORE LIKE PROFESSIONAL, ORGANIZED, FUCKIN THIEVES!!! far from amatuers my good sir!

Johnny Saint
Guest

Calm down. I believe the “amateur” reference is to the Aquino regime and his high school gang of ill-prepared, unqualified, unprofessional and at times ill-mannered bureaucrats and underlings. Given their utter lack of ability, they don’t need to be thieves to lose money.

That there are corrupt, larcenous officials in government who commit graft and organized plunder is a given. The Aquino administration is hardly unique in that regard.

Glenn
Guest

Look John, YOU CALM DOWN, or MYOB. I wasn’t talking to you. You get your panties in a bunch when someone calls you on a FALSE statement you made and uses a couple of curses. And NOW your gonna stalk me around the site as if your a moderator? YOU do not know what the guy meant by ‘amatuers’, you just DON’T, you CAN’T. So back off.
(u kno, the part where you state “I believe the…” should tell you that just because you ‘believe’ something, doesn’t make it true. Consider that a free lesson Sonny.)

Libertas
Guest

just to confirm
you are right in your interpretation

Johnny Saint
Guest

“For every 100 pesos the government should be getting –
“It doesnt collect 20 pesos which it should
“It loses 25 pesos to corruption a 45% of govt budget.
“It wastes 10 pesos through inefficiency
“It spends 30 pesos on its own bureaucracy
“It leaves 10 pesos (10%) to spend on substandard projects – requiring high maintenance costs in subsequent years just to add financial insult to bureaucratic injury.”

Libertas,

I don’t disagree but I just have to ask — Where did you get the stats? The sum of the figures you posted total 85% not 90%. What happened to the remaining 5%?

Libertas
Guest

Well spotted – the deliberate error!.
The original figure was 30% for corruption.
The figures were based upon a myriad of sources from bir, ilo, world bank, un, et alia, and used in an algorithm for a country comparison report.
This is the simplified version and therefore should only be regarded as a guesstimate.
The principle is more important than the actual figures which clearly have a margin of error +/- 5%

MKULTRA
Guest

sana ganito, sana ganoon, sana nga…..

perhaps this new “ratings upgrade” might help the country in one way or another…..but judging the government’s history on taking action on such windfalls……They’d probably squander it in one way or another…and then cry foul once more…

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