Understanding the credit-outlook downgrade

Given the lengthening record of ineptitude and the dreaded possibility that bungling incompetence would accelerate and continue well into the next presidential term, with one candidate capitalizing on the present and promising to pursue more or less the same deal that Benigno Aquino III has been inflicting on us, the news of a recent downgrade from one of the most credible rating agencies seems justified. 

Moody’s Investor Services (Moody’s), one of three among the leading international credit-rating agencies, and perhaps the most outspoken, if not apolitical, has lowered its ratings outlook from “positive” to “stable” as it set its sights on the next year and a half, with extraordinary events looming in the near horizon.

Already, recent declarations from Moody’s has set it apart and, whether justified or not, has invariably raised its professional credibility and independence standings when it showed that for a good part of the growth now experienced and adding to the self-congratulatory laurels crowned upon Aquino’s head, these would not have come about had not astute and competent economic governance been spawned as early on as Gloria Arroyo’s closing years as president and lead Philippine economist.

Analyze the data. Net out the falsehoods, lies and spin. It was Arroyo, not Aquino, after all, who had deliberately ushered us out of a downward debt spiral and turned the economy from a long-convicted debtor and deliberately transformed us into a newly minted net creditor among international funding agencies. Even the ballyhooed liquidity build-up and the downward-averaged liabilities from refinancing international debt with longer local papers were started during Arroyo’s incumbency, not Aquino’s. For the latter, do the math. Aquino’s contributions to the economy’s high liquidity standing was due to the sluggish and almost non-existent infrastructure spending, that, while enhancing volumes inside government coffers, was, sadly, at the expense of true and inclusive growth and productivity.

For government critics, these would have made excellent fodder, and indeed, in some circles, they’ve been taken to town and found the decision not to support a hollowed-out continuity platform that includes perpetuating not only economic ineptitude but political as well as social folly. Misconceptions abound and where candidates are likelier to capitalize on spin rather than merit, competence and track records, it makes sense that the public likewise falls into the same rut. Let us, however, shed some light on the downgrade, if only to appreciate the perspective of independent international credit-rating agencies, setting these apart and insulating them from the venom of a campaign trail characterized by money, machinery and mudslinging.

Outlook ratings are not about politics, the latter entering the equation only as an extrapolation. Credit ratings are about specific financial institution balance sheets, its risk-asset quality and repayments likelihood. Differentiated from a ratings watch that are event-driven, often less than a year in scope and quickly resolved, outlook ratings span from a year to two and reference trends in the macro-economy rather than specific events or individual financial institutions.

Against the backdrop of a 25-basis point increase in policy rates this December, election spending and the prospect of governance changes by mid-year, when we focus on the financial sector and factors that influence creditworthiness of private financial intermediaries, there is little that might impact negatively or positively save for three eventualities. Hence, a “stable” outlook.

One, bank capital adequacy ratios (CAR) may move south as institutions extend credit to underserved sectors with less stellar asset qualities. These invariably increase risk assets.

Two, such loans necessitate increasing bank-deposit liabilities and force rates farther up. The failure to balance risk assets with liabilities will shift pressure to overall capital and the cyclical vectors once more focus on CAR.

Three, as the cost of credit and net interest margins rise to protect asset quality, coveted financial inclusion for those who need it may become even more elusive than it already is.