EARLIER this month, when Moody's Investors Service raised its credit rating on the Philippines to just two steps below investment grade, government spokesmen were quick to give themselves a collective pat on the back.
Moody's decision, said Finance Secretary Cesar Purisima, was an affirmation of the government's economic agenda, showing that the country had 'exceptionally promising growth opportunities' for investors.
While officials hailed the decision, which followed months of hard lobbying, the idea that the Philippines' time had come seemed lost on investors. The announcement had minimal effect on financial markets, and few outside the government seemed to believe that the sovereign debt upgrade would have much impact on the level of foreign direct investment (FDI).
One reason is that the announcement merely brought Moody's in line with other debt rating agencies such as Fitch and Standard & Poor's. Moreover, the upgrade still put the Philippines at a lower rating than countries such as Indonesia. It also fell short of the rating achieved during the Ramos presidency in 1997.
The more important reason, however, is that despite recent macroeconomic improvements, the hard decisions that could place the country on a sustainable growth path have yet to be made.
In one sense, government officials were correct. In justifying the upgrade, Moody's noted the 61 million peso (S$1.7 million) budget surplus recorded as of April, which it described as 'a notable turnaround in fiscal management'. The nation's debt-to-GDP ratio fell to 51.2 per cent in the first quarter, from 53.9 per cent last year.
Vulnerabilities from a possible cessation of capital inflows, said Moody's, were also being mitigated by growing foreign exchange reserves. Central Bank figures for May show that foreign reserves now cover 10.6 months of imports.
Not all economic improvements have been the result of government action, however. The economy grew by 7.6 per cent last year (producing higher government revenues) as a result of election spending and increased exports - leading to higher foreign exchange reserves. The stronger peso (itself a reflection of the weakening US dollar) also helped reduce the foreign debt burden.
Conditions that could bring down the nation's credit rating, said Moody's, are a structural weakening in the balance of payments, uncontrolled inflationary expectations and deteriorating finances.
Of these, the latter may be among the most vulnerable. Already, the Department of Budget and Management is talking about hiking expenditure on social services next year. The government has also announced a five-year military upgrade costing 40 billion pesos to support Manila's territorial claims in the South China Sea.
Fiscal prudence and good credit ratings are important. But the country needs to do more for sustainable growth. Last year, the Philippines attracted a mere US$1.7 billion (S$2.1 billion) in FDI. This is very low compared to Malaysia (US$7 billion), Thailand (US$6.4 billion), Indonesia (US$5.4 billion) and Vietnam (US$7.6 billion).
Investing Across Borders, a report published by the World Bank last year, gave important clues as to why this is so. 'Among the 87 countries covered by the Investing Across Sectors indicators, the Philippines imposes foreign equity ownership restrictions on more sectors than most other countries,' it declared.
It also noted that it took 17 procedures and 80 days to establish a foreign-owned limited liability company in Manila, much slower than the average for East Asia and the Pacific. Another problematic area was arbitration, where it took around 135 weeks to enforce an arbitration award.
Mr Purisima wants to concentrate on ensuring that the nation's sovereign debt attains investment grade status. It would be better, however, if economic planners were to focus instead on the structural and institutional problems holding up private investment. This involves serious reform, including raising standards of governance and opening up more sectors of the economy to foreign investment.
Access to cheap financing is a laudable goal. But it pales in comparison with the ability of a country to attract the sort of direct investment needed to ensure long-term economic growth.
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By: Bruce Gale [email protected]
Source: The Straits Times Singapore, June 29, 2011
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