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The Globe and Mail

Credit-rating obsession could cost Philippines dearly

Reuters Breakingviews delivers agenda-setting financial insight. Its global correspondents react to stories as they develop, delivering sharp and provocative commentary on big financial news as it breaks.

The Philippines is on an unhealthy low-debt diet. Manila's obsessive pursuit of a one-notch ratings upgrade, which would grant the sovereign investment-grade status, could have unwanted side effects.

Manila pared its budget deficit to 2.3 per cent of GDP last year, lower than its 2.6-per-cent target. The government's debt held steady at 51 per cent of GDP, down from 55 per cent in 2008. Normally, this would be considered good housekeeping. But not when influx of foreign money through capital inflows and remittances by overseas Filipinos is as strong as it is now.

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Overabundant liquidity could lead to mispriced private credit and unsustainable asset booms, prematurely ending what is currently Asia's most promising story of economic revival.

Unless the government sells more bonds, there is no cheap way to drain out the unwanted cash. The monetary authority recently cut its so-called special deposit account rate by half a percentage point, because it balked at the 3-per-cent annual interest rate it was paying banks to take their excess pesos for up to a month. That's a risky move for an economy that has witnessed 25-per-cent year-on-year growth in real estate loans over the last 22 months, according to Royal Bank of Scotland.

Now it's up to the government to mop up the surplus cash. One idea, favoured by Finance Secretary Cesar Purisima, is for Manila to borrow more at home than abroad. This makes sense, since issuing foreign-currency debt means further pressure on the peso to appreciate, which in turn lures even more overseas capital to the nation. Yields on three-month treasury bills are almost zero. A money glut in a fast-growing economy like the Philippines can be dangerous for financial stability.

Warding off the threat also requires Manila to be less fixated on its credit rating. Debt markets have already rewarded President Benigno Aquino's administration for good governance; the cost of insuring against default on five-year sovereign debt is 101 basis points, 33 basis points below Indonesia, which is rated a notch higher by two of the three main rating agencies. Risking financial stability for a dubious stamp of approval is a lousy gamble.

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