We finally nailed the much coveted investment grade. Well at least one international debt watcher, Fitch Ratings, already upgraded us to BBB- from BB+. The market and our government have been anticipating this upgrade since last year.
True enough, as it was announced yesterday afternoon, as if right on cue — a few hours before market closing for the Holy Week and being the last trading day for 1Q13, the stock market reacted very positively — jumping to 6,850 levels, boosting the index recovery coming from a pullback to sub-6,600 levels due to a correction the past week.
But what does this upgrade mean for the country? Let me share some insights I gathered while attending a few lectures lately.
More Foreign Funds
Having investment grade is good precisely because this means the Philippines is of investment quality in the eyes of reputable rating agencies. The country is stable, safe and profitable enough to invest in, not in any danger of default as what we hear in Western countries in need of bailout.
In fact, even prior to this upgrade, foreign funds or “hot money” have been flowing into our markets boosting the run of our PSEi. What more now that we now have one confirmation that indeed, the Philippines has reached investment grade? With the increasing liquidity from the West (US is pumping up its liquidity) plus this favorable upgrade, then even higher foreign investments may be expected.
But Not Much FDI
FDI or foreign direct investments are money from other countries used to finance actual projects and infrastructure and business set-ups in the country. This has more visible impact to our economy compared to just money invested in the stock market. This also has better trickle down effect (and multiplier effect) to our poorer countrymen as this eventually generates more jobs and economic activity.
We are not seeing much increase of FDIs though in spite of higher foreign in flows in the stock market. I hope at least not yet but soon. Money invested in the stock market may easily be pulled out through mere selling of stocks in case there are better prospects in other countries. Whereas FDI is meant to stay in the country, for the long-term, and for greater benefit outside PSE-listed firms and investors.
Even Stronger Peso
Investment grade implies that foreign currency flowing into the country will increase, which means higher demand for the PHP (since they need to transact here in PHP), which could mean further PHP appreciation. This can be a double-edged sword though. A strong PHP, as we have been seeing lately reaching PHP40 : $1 levels, may be favorable in terms of increased purchasing power vis a vis foreign currencies. On the other hand though, a big chunk of our recent economic progress is fueled by the growing BPO industry in the country, plus OFW remittances. These two, plus our export industry, will have more difficulties with a stronger peso because operations costs (for BPOs) and exchange rates (for OFWs) will be more expensive.
A tough balancing act really since we want investment grade but it might hamper two of our key economic drivers.
BSP to the Rescue
Our dear BSP has been holding the fort in terms of keeping PHP appreciation at bay, as they have been buying foreign reserves to tone down the strong PHP. I forget how much the ideal foreign reserves must be, something like 3 months worth only, but last I heard was that BSP reserves is good to last for a year. So that’s how much foreign reserves they have accumulated just to keep PHP within 40 levels. Otherwise, some say that PHP should have already reached PHP35 : $1 levels if not for BSP.
So what now that we can expect more foreign currencies to come? BSP will be once again on a buying spree?
As a result, BSP has been losing money as a corporate entity. Well they proudly admitted that their role anyway is to be a regulator, and not really to generate profits. Add to that the billions they have been paying out as interest for SDA investments which stands at around PHP1 Trillion pesos. No wonder they have been trimming down the SDA interest rates lately to discourage such placements, and direct these money to higher yielding vehicles and economic activity.
Imagine that PHP 1 Trillion all going to the stock market. Long shot maybe given Filipino’s risk appetite and knowledge of the stock market.
We now see a glimpse of the two sides of the same coin. We are now one foot inside the investment grade club and I hope such status lasts for long. I hope other ratings agencies follow suit in upgrading the country in their own scorecards. But above all, I hope this upgrade brings us more benefits that will trickle down to the lowest of lows, instead of bringing us more harm. And kudos to BSP as they try to manage and balance all these.