The immediate and elated responses of the Philippine government to credit ratings agency S&P Global’s revision of the country’s outlook last November from “stable” to “positive” reveals a deep misprioritization in its economic policies. There was also a somewhat embarrassingly coordinated toadying toward the president: the finance secretary said it was “another powerful endorsement of President Ferdinand R. Marcos Jr’s leadership,” the budget secretary called it “a testament to President Ferdinand R. Marcos Jr’s strong leadership,” and the House speaker claimed it “proves the strong leadership of President Marcos.”
Rating what
The economic managers don’t seem to realize that credit ratings are just, well, credit ratings. In their joint statement, they implied that getting an “A rating” is an indication of a “transformation of the economy.” The term however is pretty clear and “credit ratings” are just about the country’s ability to repay debt, and external debt in particular. These ratings shouldn’t be overstated as any kind of measure of economic performance or much less of national development.
For instance, S&P Global’s key rating factors are listed as institutional assessment (with focus on public finances), economic assessment (narrowly understood in gross domestic product or GDP terms), external assessment (focused on external debt and financing), fiscal assessment (about government debt and debt service), monetary assessment (apparently about the exchange rate, interest rates and inflation) and the ambiguous “indicative rating” and “notches of supplemental adjustments and flexibility.”
These indicators may be relevant to foreign creditors or investors who want to make sure that they are repaid or get returns on their investment. However, they’re not the ultimate indicators that really matter for the people whom the economy should most of all be for.
Rate this
As such, we shouldn’t make so much of the “positive” outlook especially because many key indicators show an economy in distress. According to the Social Weather Stations (SWS), self-rated poverty and hunger have increased since the start of the Marcos Jr administration to 16.3 million or nearly three-out-of-five (59%) Filipino families, and to 6.3 million or one-out-of-four (23%), respectively, as of September 2024. The Bangko Sentral ng Pilipinas (BSP) reported that the number of households without savings grew to over seven-out-of-ten (71%) or some 19.2 million households as of the third quarter of 2024.
According to the latest Philippine Statistics Authority (PSA) data, manufacturing’s share of the economy has fallen to 17.3% of GDP in the first three quarters of 2024, which is the smallest in nearly 80 years since the late 1940s. The agriculture sector’s 7.8% share is the smallest in the country’s history. Increasing distress among families and eroding productive sectors are self-evidently not indications of a positive outlook for the economy.
Having said that, the “positive” outlook is a little perplexing even by the usual metrics of the country’s ability to repay its external debt.
Measured as a share of GDP, the country’s external debt ratio (28.9%), external debt service burden (3.2%), current account deficit (-3.2%), and national govt deficit (-5.1%) are all still much worse than before the overlong pandemic lockdowns. Economic growth is weaker, the peso has depreciated to record lows, and overseas remittances have slowed. Even international reserves have depleted in the last four years, measured in terms of months of import cover.
The large projected increase in government revenue from the digital service tax may be a source of optimism underlying the “positive” outlook. But even this revenue optimism must be tempered by the revenue-losing Corporate Recovery and Tax Incentives for Enterprises (CREATE) and CREATE MORE (Maximize Opportunities for Reinvigorating the Economy) law and the similarly revenue-draining Package 4 being deliberated. As it is, the economic managers have already reduced revenue projections and increased deficits from their original medium-term fiscal framework targets.
Rotten rates
It’s also possible that the “positive” outlook is at least partially politically-motivated. Contrary to the perception of objectivity, the United Nations (UN) independent expert on foreign debt and UN Trade and Development (UNCTAD) have already pointed out how the oligopolistic big three ratings agencies – S&P Global, Fitch Ratings and Moody’s – are inconsistent in their assessing countries and have been known to make biased or politically-motivated ratings. An UNCTAD economist even explicitly called them out for their “marked ideological bias.”
The US government in particular has disproportionate influence and may be nudging the Philippines’ ratings in an attempt to boost the economy as a more stable ally in the region against China. Ratings upgrades would bolster the Marcos Jr administration’s economic propaganda as “booming,” “[having] all the makings of a tiger economy,” and “a rising economic superstar in ASEAN.”
It’s worth pointing out though that past credit upgrades which enhanced the country’s image and presumably made credit cheaper have not arrested the secular decline of agriculture and manufacturing, nor substantially reduced poverty or lessened severe inequality. It’s also worth recalling that the series of credit upgrades from 2010 to 2015 under the Aquino III administration was actually during a period of weakening job creation and rising self-rated poverty.
Rate escape
The government has seized on a fragment of seeming economic good news to bolster its narrative of economic success. They’re also exploiting how the public can sometimes be enamored by praises from international bodies, without critically understanding the basis of such praise and whether they’re even really valid.
It should be self-evident that “economic performance” goes far beyond credit ratings and should include social outcomes, the conditions of the majority, and the state of domestic agriculture and Filipino industry. There’s already quite a lot of data to refute the government’s hyperbolic claims of good economic performance.
The administration’s gushing statements however just show how economic policymaking is overly determined by the fixation on reducing deficits and debt to preserve credit ratings. Credit rating agencies favor fiscal austerity, fiscal discipline and prioritizing debt servicing over investments in health, education, and social welfare. This is counterproductive for social welfare and long-term development. It exacerbates poverty and inequality, as well as hinders the structural transformation needed for long-term economic growth and human development.
Proactive fiscal response justifies deficit spending, additional borrowing (including taking advantage of investment grade credit ratings and low interest rates), and revenue generation from a more progressive tax system that taxes the rich and large corporations. Spending on the economy to spur growth will also itself boost revenue collections as economic activity is restored.
The economic managers need to overcome their narrow-minded focus on vague “fiscal consolidation” as a metric of good economic performance. Social protection, social services, and economic recovery are the paramount concerns.
