Rating upgrade won’t automatically lead to FDI flows, businessmen caution

MANILA – (UPDATE 3, 5:17 p.m.) The business community on Wednesday welcomed the Philippines’ upgrade from Fitch Ratings, but reminded the government that foreign direct investments (FDI) — the kind that creates jobs — won’t be forthcoming if constraints to doing business in the country remain.

Early this afternoon, Fitch Ratings announced that it raised the country’s credit score to investment grade, the first of three major international debt watchers to bestow their seal of good fiscal housekeeping on the Philippines.

“There will be more FDIs from institutional investors who are restricted from investing in countries below investment grade. The rating is a recognition of the stable fiscal policies and programs of the government,” Employers Confederation of the Philippines (ECOP) president Edgardo G. Lacson told InterAksyon.com.

European Chamber of Commerce of the Philippines (ECCP) executive vice president Henry J. Schumacher is less sanguine.

“It’s great and I congratulate the government for having achieved it. But not having investment grade was not the reason for extremely low foreign direct investments. Those reasons need to be addressed to achieve productive investments leading to job generation and inclusive growth,” he said, referring to infrastructure bottlenecks and red tape in government.

The Aquino administration’s infrastructure showcase — the Public-Private Partnership (PPP) Program — has failed to accelerate, bogged down by slow preparatory work on the part of government as well as investor concerns on bidding rules.

The Mactan Cebu International Airport passenger terminal project is a case in point, as the Department of Transportation and Communications (DOTC) moved back the timetable thrice, as government had to change bidding rules to accommodate wider investor interest.

“[T]he upgrade significantly improves the climate for financial investments, but for brick and mortar FDI, market size and competitive production costs are more critical factors than financial ratings,” said American Chamber of Commerce of the Philippines (AmCham) senior adviser John D. Forbes.

In fact, the Philippines barely improved in its performance as a business-friendly location, slipping two notches in the 2013 Ease of Doing Business report of the World Bank.

“Long been anticipated”

Benjamin Diokno, economics professor at the University of the Philippines, said the investment grade rating is “good news.”

“Should the government desire to borrow money from abroad, then the impact of the upgrade is likely to be neutral. The upgrade has long been anticipated, and its effect has already been reflected in the Philippine bond prices,” he said, referring to the record low rates of Treasury bills and bonds.

“Moreover, it is not in our interest now to borrow money from abroad. It is better to borrow domestically considering that the domestic market is awash with pesos. And government authorities have already decided, rather belatedly, that it is financing its deficit from domestic sources,” Diokno said, citing the P1.8 trillion parked in the Bangko Sentral ng Pilipinas’ special deposit accounts (SDA).

“The private sector can borrow at rates determined by supply and demand for investible funds. Right now, given the continuing economic mess in Europe and the uncertainty in the US, world interest rates are at its historic low. Sometimes, the borrowing costs of the private sector is tied to the cost of sovereign bonds; if so, the private sector benefits from the credit upgrade,” he said.

Diokno agreed that the upgrade won’t lead to a surge in FDIs for the Philippines. “FDI inflows depend on a different set of variables such as cost of doing business, state of public infrastructure including existence of sufficient, affordable and reliable power supply, policy consistency and credibility,” he said.

“Moreover, some restrictive provisions in the Constitution may continue to deter foreign investors from making long-term commitments to the Philippines,” he added. –with reports from Ben Arnold O. De Vera and Darwin G. Amojelar, InterAksyon.com