“`html
THE UNITED STATES’ recent credit rating downgrade may advantageous for the Philippines and other developing markets as it could encourage investors to diversify their holdings.
“The US credit downgrade negatively affects the US dollar and US dollar-linked assets but is advantageous for the peso as global funds move towards non-dollar investments, which includes emerging market asset categories. The Philippines is included in the emerging market spectrum,” Cristina S. Ulang, the research head at First Metro Investment Corp., stated.
“It’s conceivable that the downgrade might prompt some investors to steer away from dollar assets,” Luis A. Limlingan, sales head at Regina Capital Development Corp., mentioned in a Viber message. “This might create an opening for markets like the Philippines, but any transition would hinge on overarching risk sentiment and how local factors compare with those of other emerging markets.”
Moody’s Ratings last week reduced the US’ long-term issuer and senior unsecured ratings to “Aa1” from “Aaa,” modifying its outlook to “stable” from “negative.”
The credit agency indicated that this downgrade “reflects the growth over more than ten years in government debt and interest payment ratios to levels that are notably higher than similarly rated sovereign entities.”
This action stripped the US of its final triple-A designation from the three major credit agencies. In 2011, S&P Global Ratings lowered the US’ sovereign long-term credit rating to “AA+” from the highest investment grade of “AAA.” Fitch Ratings in 2023 also downgraded the nation’s rating to “AA+” from “AAA.”
The Philippines maintains investment-grade evaluations from all three credit agencies. S&P in November of the previous year upheld its “BBB+” long-term credit rating for the nation, one tier below the “A” level grade desired by the government, and upgraded its outlook to positive.
Conversely, Fitch and Moody’s assess the Philippines at “BBB” and “Baa2,” respectively, with stable outlooks, a tier beneath S&P’s rating. Fitch reaffirmed its long-term rating in April, while Moody’s most recent sovereign rating action was disclosed in August 2024.
The Philippines’ manageable debt-to-gross domestic product (GDP) ratio might render it a more attractive option for investors, Ms. Ulang remarked.
The government aims to reduce the debt-to-GDP ratio to 60.4% by the conclusion of 2025, and to 56.3% by 2028. The debt as a fraction of GDP was at 62% by the end of the first quarter.
BDO Senior Vice-President and Trust and Investments Group Head Frederico Rafael D. Ocampo stated that the fiscal issues highlighted by Moody’s for the rating downgrade could lead to a weaker performance of US assets in the short term as investors seek alternative markets.
“While the immediate response following the announcement was a sell-off across most US assets, this move has been partially corrected as investors aim to capitalize on lower valuations,” Mr. Ocampo noted in a Viber message.
“Looking ahead, we expect US-denominated portfolios to underperform following a broader risk-off sentiment in US assets in the near future, particularly if the US government fails to tackle the more systemic challenge of an enlarging deficit funded by increased borrowings.”
Mr. Ocampo emphasized that elevated long-term rates could “exert pressure on portfolios with considerable exposures at the tail end of the yield curve, such as those belonging to insurance companies and pension funds.”
BORROWING COSTS
Bank of the Philippine Islands (BPI) Lead Economist Emilio S. Neri, Jr. similarly remarked that rising rates could influence borrowing expenses.
“Investors may seek higher yields on US government debt to offset the perceived increase in risk,” Mr. Neri mentioned in a Viber message. “This could affect local corporations in the Philippines with dollar-linked debt, as they may encounter higher borrowing costs.”
However, the increase in interest rates might be minimal as the US’ credit rating remains high, even with the recent downgrade.
“Moreover, local corporations or investors holding US Treasuries could experience a drop in the value of their assets if yields rise, since bond prices generally move inversely to interest rates,” he continued.
“Spillover effects on emerging markets overall might result in increased borrowing costs when there is a demand for higher premiums with heightened risk due to the downgrade pushing rates relatively higher,” Mr. Limlingan added.
Meanwhile, Leonardo A. Lanzona, an economics professor at Ateneo de Manila University, expressed that while the downgrade might induce a shift away from US risk assets, the Philippines may not necessarily be the primary choice for investors.
“Given that the Philippines is linked to the US, I doubt (there) will be significant investment in the Philippines. Nations that have divested from US assets are more likely to benefit. Canada and Europe might have already done this,” he stated in an e-mail.
“Filipino investors can redirect their investments in different countries, although the choices might be restricted to China.”
Mr. Lanzona added that the US economic concerns flagged by Moody’s would also adversely affect the Philippines.
“This can result in both real and financial repercussions for the nation. In a real sense, the country will be impacted since the US stands as the top importer for the country.”
The Philippines ought to adopt economic policies that “promote domestic production and enhance protections for workers,” he asserted, especially amid global uncertainties.
“Accelerating technological innovation within the country and providing greater flexibility for firms and workers should be prioritized,” Mr. Lanzona concluded. — Luisa Maria Jacinta C. Jocson and Aaron Michael C. Sy
Source link
“`