Philippines aims for ‘A’ credit rating by 2028. Here’s why it matters.

MANILA, Philippines – The Philippines is pushing to achieve an A credit rating from international rating agencies by the end of President Ferdinand Marcos Jr.’s term in 2028 – an ambitious goal that could eventually save the country hundreds of billions of pesos.

“An A rating would affirm the Philippines’ creditworthiness and would serve as a strong signal to local and international business and financial communities that the country is conducive to long-term investments,” Finance Secretary Benjamin Diokno told reporters on Friday, August 4.

In particular, the government wants to secure an A rating from the Big 3 rating agencies – Moody’s, Fitch, and S&P – as well as Tokyo-based R&I, or Rating and Investment Information, and the Japan Credit Rating Agency. 

The Philippines already qualifies as investment-grade – albeit on the low end – under the three major rating agencies.

Agency	Rating / Outlook	As of
S&P Global	BBB+/Stable	November 2022
Fitch Ratings	BBB/Stable	May 2023
Moody’s Investors Service	BAA2/Stable	September 2022
Japan Credit Rating Agency	A-/Stable	March 2023
Rating and Investment Information	BBB+/Positive	August 2023

Among the Big 3, the Philippines’ highest sovereign credit rating currently comes from S&P, which pegs it at BBB+, one level below a minimum A rating. Fitch rates the country at BBB while Moody’s classifies it as BAA2.

Why do credit ratings matter?

The Philippines routinely borrows billions from global banks and creditors to finance its budget. They in turn charge the country interest on the amount borrowed. These creditors base their interest rates on the assessment of international rating agencies, such as the Big 3.

Countries with lower ratings and outlooks are typically charged higher interest rates because they’re perceived as riskier. Although the Philippines is already considered investment-grade, going up to a better rating means the country can negotiate for more favorable borrowing terms.

“Ang kagandahan ng (What’s good about an) A credit rating, the borrowing cost of the government will, of course, decline – and also the private sector,” Diokno said on Friday. “So makakaganda ‘yan sa kabuhayan ng lahat ng tao. Makakahiram ka nang mas mura. ‘Yan ang benefit niya (It’ll be better for everyone. You’ll be able to borrow for cheaper. That’s the benefit).”

In 2023, 11.6% of the national budget – about P611 billion of the P5.268 trillion – was used for the country’s debt burden. That includes P582.3 billion paid in interest. In 2024, the amount allocated for the debt burden will climb to more than 12% of the national budget – equivalent to P699.2 billion.

Should the Philippines manage to get an A credit rating, the government could save billions from having lower interest payments, which the Department of Finance (DOF) said could be reallocated to other socioeconomic programs. A better credit rating can also serve as a signal to investors, raising investment interest and confidence in the country. 

And according to Bangko Sentral ng Pilipinas (BSP) Governor Eli Remolona, the finance industry has already begun to anticipate an upgrade. The spreads on credit default swaps – a type of forward-looking financial instrument – have already dropped to around 70 basis points, from as high as 700 basis points in the past. 

“‘Pag tinignan ninyo ‘yung credit default swap spreads, it’s based on a five-year horizon. Mga 69 o 70 basis points na lang. Parang single A na ‘yung rating natin. Ang sinasabi ng CDS market, inaanticipate na nila ‘yung single A natin,” Remolona told reporters on Friday.

(If you look at credit default swap spreads, it’s based on a five-year horizon. It’s just around 69 or 70 basis points. That’s almost like a single A rating. What the CDS market is saying is they’re already anticipating our single A rating.)

How does the Philippines get to A?

Since 2019, the BSP and the DOF have organized a joint committee for this very purpose: the Inter-agency Committee on the Road to A Credit Rating Agenda. The committee adopted a three-pronged strategy to achieve, which focuses on “solid economic growth, prudent fiscal management, and strong governance standards and institutions.”

For economic growth, the committee is relying on meeting its real gross domestic product (GDP) growth target of 6.5% to 8% from 2024 to 2028. The Philippines is also eyeing to achieve upper middle-income status by 2025. Another part of the strategy is addressing infrastructure gaps by “accelerating high-quality and high-impact investment spending.” (READ: Marcos wants P1.418 trillion for Build Better More infrastructure campaign)

When it comes to fiscal management, the government is looking to reduce its fiscal deficit – or the amount that the government is overspending compared to its income. Outstanding debt in the first quarter of 2023 was right around target at 61% of the country’s GDP.

Aside from lowering debt, the government is also hoping to bump up its income through better tax collection and new taxes being deliberated on in Congress, such as excise taxes on single-use plastics, pre-mixed alcoholic beverages, sweetened beverages, and junk food, as well as a new mining fiscal regime.

The final part of the government’s strategy involves setting governance standards and institutions that would “create a vigorous investment environment that would stimulate investment inflows,” among other things.

In the meantime, the Philippines is already making bold financial moves, such as signing into law the controversial Maharlika fund. Diokno, who will concurrently head the DOF and Maharlika Investment Corporation, said the measure’s implementing rules and regulations could be out by mid-August while the team to run the fund could be ready by September or October.  But it remains to be seen whether the new investment fund – which could risk public coffers if it fails – will bolster the country’s chances for its coveted A rating. – Rappler.com