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Can inflation impact Philippines credit rating?
FOOD and non-alcoholic beverage price increases have caused the Philippine inflation rate to jump to a three-year high of 6.1 percent last month, exceeding the government’s target for this year.
According to the Philippine Statistics Authority data, the current rate is the highest it has been in more than three years, or since October 2018, when it was 6.9 percent.
The Bangko Sentral ng Pilipinas’ (BSP) projected range of 2- to 4-percent average inflation for 2022 has been exceeded by the consumer price growth of 4.4 percent so far this year.
While we all know that high inflation rate has an impact on borrowing costs because central banks seek to tighten their monetary policies by raising interest rates to control rising prices, it is also important to understand how this latest development affects a country’s credit rating.
Notably, three of the most influential worldwide debt watchers, Fitch Ratings, Moodys Investor Service and S&P Global Ratings, currently assign the Philippines investment-grade credit ratings.
The following are what some of the country’s economic experts had to say when we asked them about how rising inflation would affect the Philippines’ investment-grade credit rating:
Inflation is “harmless” to determining credit ratings, said Union Bank of the Philippines chief economist Ruben Carlo Asuncion, unless the central bank performs poorly in upholding its responsibility of price stability.
“In my own study of determinants of credit ratings, the level of inflation does not seem to be a huge factor unless dealing with price levels are eventually bungled by government authorities,” he stressed.
For her part, Domini Velasquez, senior economist at China Banking Corp., said a country’s credit rating can be impacted by inflation if it indicates deteriorating macroeconomic conditions.
However, she pointed out that a higher inflation rate alone should not affect the country’s rating or rating outlook, especially given the current global climate of rising prices mostly caused by supply side difficulties, such as the conflict in Ukraine.
“As long as the BSP is able to anchor inflationary expectations and as long as its impact on economic growth and public finances [through higher borrowing costs via FX (foreign exchange) and interest rate channels] are contained, the elevated inflation the country is experiencing now will not be a credit negative for the Philippines,” Velazquez added.
Meanwhile, Rizal Commercial Banking Corp. chief economist Michael Ricafort said four fundamental pillars — relatively stronger economic growth, sustainable fiscal and debt management, a strong external position, and efficient monetary policy — are responsible for a country’s credit ratings.
“Relatively higher inflation, especially above the target under the inflation targeting framework, could lead to slower economic growth [as higher prices drag economic output] and could fundamentally lead to higher interest rates that, in turn, increases financing costs… of the government and other borrowers and could add to the country’s outstanding debt-to-GDP (gross domestic product) ratio, which determines the country’s credit ratings,” he added.
Meanwhile, Emilio Neri Jr., head economist at the Bank of the Philippine Islands, said rising inflation is more of a symptom than an issue that could result in a credit downgrade.
While the rationale for a downgrade may come from inflation itself, he added, it may also come from the sovereign’s policy decisions over how to deal with inflation.
“If sizeable reductions in taxes (e.g., lifting of excise taxes on fuel) or unreasonably expensive subsidies (P20 [per] kilo [of] rice) are given away, rating agencies might consider a revision of our credit outlook since these policies could lead to a widening of the budget deficit and a ballooning of the debt,” Neri explained.
Preventing downgrades
UnionBank’s Asuncion said in order to prevent a credit rating downgrade, good governance is one of the crucial factors to consider. Credit rating agencies examine things like levels of corruption, the ability to collect taxes, a history of defaults, among other things.
He highlighted “good fiscal governance is key and the ability to pay debt obligations is important.”
The national government’s non-monetary administrative measures, such as increasing importation and lowering of tariffs of some goods, targeting subsidies to the most vulnerable, among others, show the its efforts in mitigating inflationary pressures, said China Bank‘s Velasquez.
She also cited the BSP’s recent aggressive action, through the off cycle rate hike and its guidance on its ability to rein in inflation by 2024.
Credit rating agencies, Velazquez added, would likely perceive this “as positive efforts to ensure a stable macroeconomic environment.”
Source: https://www.manilatimes.net/2022/07/25/business/top-business/can-inflation-impact-ph-credit-rating/1852089