I SOMETIMES wonder if ratings agencies such as S&P Global Ratings, Moody’s Investors Services and Fitch Ratings are given too much credence by governments.
Clearly, the agencies have much influence when it comes to government borrowing. A poor rating means that the government, in practice, will have to pay a higher interest rate when it borrows compared with a lower rate of interest if the rating is good.
Bangko Sentral ng Pilipinas (BSP) Governor Benjamin Diokno says, rightly, that the country’s credit rating remains at its present level despite the rising costs associated with attempts to counteract the adverse effects of the pandemic.
Diokno says that the ratio of debt to gross domestic product (GDP) has risen as a result of government expenditure designed to reduce the adverse effects of COVID-19.
True.
He also mentions that the debt to GDP ratio remains below the 60 percent ‘internationally accepted threshold’.
Internationally accepted?
Who says?
Much of the world’s economy is based from countries whose debt to GDP ratio is over 100 percent. Not all these countries are banana republics. In fact both the US and the United Kingdom have this level of indebtedness.
Nevertheless, the debt to GDP ratio is a guide to the ability of a nation to handle its debt.
The European Union (EU) maintains a watching brief over the economics of its member states. For some years, Greece acquired a debt which was considered by many to be too high. In fact, debt reached 180 percent of its GDP and an austerity program was necessary to ensure that Greece would reduce its debt level.
Italy is another EU member state which has high indebtedness. But Italy is a country which seems to ride political and economic difficulties without lasting harm.
From an economic point of view, I believe that the Philippines has coped well with the pandemic. Nevertheless, it is likely that our debt/GDP ratio will exceed 60 percent by the end of this year.
Does this mean that the ratings agencies will reduce our rating so that the cost of government borrowings is likely to rise.
I hope not and consider it unfair if this were to happen.
For at least the past decade, the Philippines has implemented a responsible fiscal policy.
We do not live beyond our means.
When government expenditure rises, as it is at present, there is examination as to how government income can be increased.
For example, the government is currently carrying out a property valuation ‘reform’ program which is expected to boost real property tax collections by 25 percent from 2023.
Yikes!/PN
