Aquino’s rating obsession cost P0.5 billion

President Benigno Aquino’s government has spent nearly half a billion pesos in its obsession to lobby credit rating agencies to upgrade the Philippines’ sovereign ratings from its speculative category.

To project an image that Aquino’s becoming president alone boosted the country’s credit ratings, Finance Secretary Cesar Purisma right after his boss’ inauguration June 30, 2010 asked Fitch Ratings’ and Standard & Poor to rate the country’s sovereign risk. 

To Purisima’s chagrin, Fitch maintained it’s last rating (May 2009) for the previous government, at BB. Standard & Poor (S & P) however upgraded it from its lower rating July 2009 by a notch to BB-. In January, Moody’s would also move the country up by a notch from Ba3 to Ba3 positive (equivalent to BB-)

However, all these new ratings meant Philippine credit was still speculative and not investment grade, and the improvements had nothing to do really with Aquino—unless one believes he is a miracle worker who changed the country’s economy within six months. It was due to his predecessor President Arroyo’s stellar success in putting the country’s finances in order starting with the E-VAT law in 2005—which actually cost her popular support— and in steering the country through the 2007 -2009 global financial crisis.

The problem of course was that the economy and government finances was hardly unchanged since Aquino assumed office, with the record high of tax–to-GDP ratio of 16 percent in 2007 unbroken, with the similar measure last year only at 14 percent. Other macroeconomic fundamentals would also require years to change. For instance, the Philippines GDP per person in 2012 was at $2,600, growing insignificantly from 2010, and far from the average of investment-grade countries of $11,000.

So what is the finance secretary to do? Try and try again. Keep dropping the coins in the jukebox.

Upgrading of the country’s credit ratings is undoubtedly important. However, what raised eyebrows in the international financial community was that the Philippines asked for upgrades from all the three main credit rating agencies, and within six months, as if it was pitting one agency against another to come up with an upgrade, and even in effect bribing them, by “buying” as often as possible their products, i.e. the ratings.

In 2011 for instance, Aquino asked the three agencies for five assessments, while in 2012 another five, as if the country’s macroeconomic fundamentals would change within six months. The Philippines under Aquino has in fact become a record holder for “buying” as often as it could the credit rating agencies’ “products”, even if it was not in a financial or economic crisis. (That situation would require frequent assessments of the impact of a government’s efforts to weather the crisis.)

The Philippines has been like a sick man “going to one doctor to another and so often, hoping to get a good diagnosis,” a foreign banker quipped. This practice—called “rate-shopping”—actually has been a major criticism for the rating system, as it has been alleged that certain credit rating agencies have been known to unexpectedly change its assessments after several other grades by its rivals have been unchanged. In the Philippine case, observers are keenly awaiting whether the two bigger agencies, S & P and Moody’s would follow the smaller Fitch Ratings’ upgrade .

This obsession to get good ratings is just fine for the credit rating agencies, since that’s where they make tons of money—S & P’s revenues in 2012 for instance topped $1 billion, and the profit margins of all three firms are over 50 percent.

Contrary to what many people think, credit rating agencies do not rate countries unless they are asked to, and unless they are paid for it.

The fees of the top three rating agencies—S & P, Moody’s, and Fitch Ratings—which account for 90 percent of corporate and sovereign ratings, are computed as a percentage (about 5 basis points) of the value of the credit papers to be rated. For sovereign (a nation’s) ratings, a straight fee is charged which ranges from $750,000 (for
Fitch Ratings reputably the cheapest) to as high as $2 million for Standard & Poor, the biggest agency. This includes the travel and accommodation fees of its analysts as well as legal fees, which have ballooned because of the legal suits brought against the three in recent years.

While the rating agencies and our government haven’t made public the fees charged for Philippine assessments, a source at the government’s inter-departmental unit the “Investors Relations Office” disclosed that the recent Fitch rating cost taxpayers “close to a million dollars”.

That fee is a low estimate since Fitch, the third biggest agency, has been undercutting its two bigger rivals with lower charges. Assuming however that that is the average cost for the 13 assessments asked by the Aquino government, taxpayers have spent $13 million for these ratings since 2010. That’s equivalent to P532 million.

Since this government has been shouting the word “transparency” again and again, I’m sure Mr. Purisima can provide the country with the more accurate cost of how much we paid for the ratings.

Is it worth it? Yes, if you believe the criticisms—which became louder since the colossal collapse of US financial firms and debt instruments which the three firms rated AAA—that the “issuer-pays” fee model (in contrast to the subscriber-pays system in the 1970s) inevitably clouds analysts’ thinking. There is even a study that found that ratings for larger debt instruments and more frequent assessments lead to better grads.

Yes of course, if it means that the government would get lower interest rates on its loans. But the government hasn’t been borrowing from the global market, since the country is awash with dollars from OFWS, and its budget deficits are under control.

And yes of course, so Aquino crowed about the upgrade last Easter, to even compare it to Christ’s resurrection.
But really, do we really have to spend half a billion pesos asking three agencies twice a year to get only one-notch upgrades?