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MANILA, Philippines - Monetary authorities believe the Philippines is resilient enough to survive the impact of the decision of Standard & Poor’s to cut the triple A rating for the United States for the first time since 1917.
Bangko Sentral ng Pilipinas (BSP) Governor Amando Tetangco Jr. made the assurance over the weekend and said they would continue to monitor external developments in the US and Europe.
Tetangco said the BSP managed to diversify its holdings composed mostly of US treasuries.
“For the BSP, US treasuries will continue to be within the allowable investible universe for our reserves even with the one-notch downgrade by S&P,” Tetangco said.
“Dips in the value of US treasuries would be compensated for by earlier diversification moves,” he said.
Tetangco said part of the preparation by investors and real money funds has been to diversify holdings into emerging market debt and commodities.
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He added the US market is not likely going to experience a huge sell-off even with the one-notch downgrade because it remains the most liquid and deepest market while Europe continues to face uncertainties due to its own debt crisis.
“Many still see the US treasury market as safe haven,” Tetangco said.
On the other hand, Finance Secretary Cesar Purisima called on the US to address “fundamental issues” following its debtdowngrade.
Purisima said the world needed other “more stable” reserve currencies beyond the dollar.
“Unless the US address their fundamental issues, I think we may have entered an era of less predictable and less stable global financial markets,” Purisima said.
“This development highlights the need for alternative global reserve currencies and benchmarks that are more stable and as liquid and convertible.”
To avert market unease, Purisima said it was important for Washington, issuer of the world’s reserve currency and benchmark debt instrument, to deal with the issues that led to its loss for the first time of its top-notch AAA rating.
“This resulting unease may in the short term make investors more tentative and may slow down the global economy,” Purisima said in a statement.
Malacañang spokesman Ricky Carandang said the downgrade is a “wake-up call” for the US.
“In a way it’s a wake-up call for the US to begin to seriously address its economic issues. We’re confident they will be able to do this,” he said.
Tetangco earlier said monetary authorities are looking at diversifying the country’s gross international reserves (GIR) by investing more in assets in Europe or beefing up the central bank’s gold reserves to reduce its exposure in the US.
The GIR - the sum of all foreign exchange flowing into the country - jumped 45 percent to a new record level of $70.997 billion as of end-July this year from $49.049 billion as of end-July last year.
Last Saturday, S&P downgraded the AAA rating of the US to AA+ with negative outlook while Moody’s Investors Service and Fitch Ratings retained the triple A credit rating of the US.
This was the first time the US was downgraded since it first received a triple A rating from Moody’s in 1917; it has held the S&P rating since 1941.
“The downgrade of the US signifies that there is great interest in how the US manages its fiscal affairs. What S&P seems to be saying is that they need more from the authorities,” Tetangco said.
Underrated
For the Philippines, the BSP chief said it would be important for fiscal authorities to pursue the Aquino administration’s fiscal consolidation program where the country’s budget deficit would be narrowed to 2 percent starting 2013 from the current level of 3.7 percent.
“The developments in the US and peripheral Europe should remind all that that there is no substitute for good fiscal management. Again, as in 2008, nothing is sacred and everyone has to be prepared for the unexpected,” Tetangco said.
For the Philippines, S&P upgraded the country’s credit rating to “BB,” or two notches below investment grade from “BB-” or three notches below investment grade last Nov. 12.
This was followed by the decision of Moody’s to upgrade the country’s credit rating outlook to positive from stable last January.
Eventually, Moody’s upgraded the country’s credit rating to “Ba2” or two notches from “Ba3” or three notches below investment grade last June 15 while Fitch upgraded the credit rating to “BB+” or one notch from “BB” or two notches below investment grade last June 23.
With the upgrades, Fitch now rates the sovereign credit of the Philippines at one notch below investment grade while Moody’s as well as S&P rate the country’s sovereign credit at two notches below investment grade with a stable outlook.
However, the BSP believes the Philippines deserves an investment grade for its sovereign credit rating as international agencies have yet to fully appreciate the country’s improving macroeconomic fundamentals.
BSP Deputy Governor Diwa Guinigundo earlier said a study commissioned by the central bank showed that international credit rating agencies have underrated the country’s sovereign ratings by about two to three notches.
“We had some study on the credit ratings. And based on these case studies, we were two to three notches underrated which means if that is considered properly then we should be an investment grade,” Guinigundo stressed.
He said the BSP conducted a study wherein it compared the macroeconomic fundamentals including reserves coverage, inflation rate, economic growth as measured by the gross domestic product (GDP), external payments position, and debt service ratio of the Philippines with other countries showed that the country’s rating was underrated.
“What we did basically was to replicate what they normally do in terms of appreciating the different aspects of a certain economy,” he explained.
Guinigundo pointed out the results of the study that involved cluster analysis were presented to the rating agencies as early as October last year as well as multilateral lending agencies including the International Monetary Fund (IMF), the World Bank, the Asian Development Bank during the latest meeting in Washington.
The study took into consideration the country’s credit default swaps and debt spreads as well as macroeconomic fundamentals that showed the credit rating of the Philippines was two to three notches underrated.
Guinigundo quickly clarified the BSP is not questioning the ratings awarded by the agencies to the Philippines.
“I think we deserve a second look but we are not preempting what credit rating agencies should be doing because they have their own timing and they have their own basis for appreciating all of the numbers that we give. The credit rating agencies will have different appreciation of those studies that we did,” he said.
Given the upgrades that we received as well as the upgrades in terms of outlook, Guinigundo said the Philippines took the right track.
“If the fiscal position will continue to improve and the macroeconomy particularly the external payments position remains strong I think we can expect a further upgrade,” Guinigundo said.
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