OUTSIDE THE BOX
Ignored by the local media, the Philippines ranks No. 16 out of 47 countries in regard to its sovereign debt rating. While the emphasis in the last two weeks was the fact that Standard and Poor’s (S&P) lowered the outlook for the United States to negative, there is another story to be told.
Financial-ratings companies issue two kinds of ratings: the current grade of its ability to pay its debts and an outlook for the future. For example, according to the three major agencies, S&P, Moody’s and Fitch, the Philippine government debt is below investment grade but the outlook is reasonably positive.
The United States government debt carries the highest quality of current rating, but the outlook is negative.
However, these three rating agencies are not the only players in the game.
Weiss Ratings was founded in 1971, reviewing US banks for its consulting clients. In 1994 the US Government Accountability Office (GAO) concluded that, “Weiss far outperforms all of the nation’s major rating agencies, including Standard and Poor’s, Moody’s and AM Best, in warning of future life and health insurance company failures.”
Weiss has specialized in digging deep into specific business sectors to look for potentially bad companies. Recently, Weiss has ventured into rating the sovereign debt of countries for its clients. Their scale is simple: A, B, C, D and E. This scale shows the Weiss Ratings view of the financial and fiscal condition of each country and allows investors to consider the relative risk and rewards in country-denominated investments.
Its Sovereign Debt Rating consists of four indices—Debt Index, Stability Index, Macroeconomic Index and Market Acceptance Index—resulting in an overall rating for each of the 47 countries studied. The basis for the evaluations is very data-oriented with little regard to factors that cannot be quantified, such as political stability. Further, it is very investor-oriented in that one factor is a “Market Acceptance Index, measuring the current and historic capacity of each sovereign government or its agencies to borrow readily in the marketplace.” Is there liquidity for the debt if you need to sell? The three other indexes are the Debt Index, which measures the country’s overall reliance on deficit financing and debts in proportion to the size of its economy and population.
The Stability Index, which evaluates the country’s strength in terms of its currency, reserves, status as a world reserve currency, access to Special Drawing Rights (SDR) and long-term default history. The Macroeconomic Index, reflecting the long-term sustainability of the economy, considering gross domestic product (GDP) growth, unemployment, inflation and other economic variables.
Out of 47 countries, the Philippines ranked No. 16, with a rating of “C plus,” and that is good. Others in the “C plus” club included Germany, Australia, Kuwait, Indonesia and Mexico. Only two countries got a perfect grade—China and Thailand. Others on top of the Philippines included Malaysia, Switzerland and South Korea. But it is those nations below the rating of the Philippines that should be both a cause for concern and a reason for some elation, since we are not among them.
At “C,” among other countries, were France, New Zealand, Japan, Canada and the United States. The nations below “C” included the United Kingdom, Italy and South Africa. Bringing up the rear with a “D” or less were Portugal, Venezuela, Spain and, of course, Greece.
Here is what is important for the Philippines. The country’s rating from S&P is “BB.” The rating “BBB minus” is considered the lowest “investment-grade” rating. That means S&P is telling the financial world that it is OK to lend the Philippine government money, but watch your back carefully and charge the government more interest.
According to the Weiss ratings, the Philippines’ “C plus” rating is the equivalent of the S&P rating of somewhere between “A plus,” at the best, and, at the worst, “BBB minus.” In other words, the Philippines is investment-grade, according to Weiss. Weiss’s “C” grade is equivalent to the other raters’ single “A” and “BBB.”
What distinguishes Weiss from the other agencies is that the banks and financial institutions pay S&P and the others to make the ratings evaluations for the countries and companies that they are going to lend to. Weiss formulates the ratings, and then sells the information to whoever wants to buy it. I would think this would put Weiss in the position of being more objective.
The foreign press has particularly singled out and questioned how the Philippines could have a higher Weiss rating than the United States. There are several specific reasons why that is so. First, as I have mentioned before, the Philippine government, if it wanted to, could be almost entirely foreign debt-free. Foreign reserves virtually equal all the foreign debt. It would sort of be like clearing out your bank account to pay all your debts, but it could be done. The second reason is that the amount of total public and private debt of the Philippines as a percentage of the total economic output, GDP, is not only manageable but better than most of the other countries on the planet. Next, the Philippine government over the last years has been able to keep a better balance between revenue and spending, keeping the budget deficit in control. However, the most important reason for the improved financial outlook for not only the Philippine government but the economy as a whole is that we are moving in a better direction. While the Philippines is improving its debt situation and budget problems, more important, the financial situation and the economy are improving.
I mean, who would you rather bet on to win—the old champion who may still be great but who is obviously past his peak and does not train hard or the new up-and-comer who has his best days ahead and knows it?
You might want to look at all the ratings at http://www.weissratings.com/ratings/sovereign-debt-ratings. There is no question in my mind that this list shows where the economic power and influence are shifting to, and it is good to see the Philippines moving up in rank.
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Thursday, 5 May 2011