Japan Credit Rating Agency reviews RP’s ‘positive’ rating

After upgrading its outlook rating on the Philippines last year, the Japan Credit Rating Agency (JCRA) is reviewing its “positive” ratings in the face of mounting concerns over inflation and a slowing economy.

JCRA arrived in the country early this week and started meeting with central bank and finance officials yesterday.

JCRA is taking off from its “positive” outlook which it upgraded last year from “stable,” indicating the possibility of a credit rating upgrade.

Usually the most upbeat of the four major credit rating agencies, JCRA said earlier that it would start considering upgrading the country’s credit rating when it could reaffirm that its macroeconomic performance would continue.

JCRA warned, however, that it is necessary for the Arroyo administration to strengthen its tax collection capability while ensuring that economic performance would lead to an expansion of tax revenues.

JCRA noted that the Arroyo administration had survived two political crises in 2005 and 2006 without bloodshed while the midterm elections in May proved orderly and relatively uneventful.

Beyond politics, JCRA said the dollar remittances from overseas Filipino workers have been maintaining solid growth in support of the country’s balance of payments and private consumption.

Remittances are expected to continue feeding the country’s private consumption this year, but exports and investments have proved extremely vulnerable to risk-aversion.

The peso was also significantly weaker this year as foreign exchange inflows gradually drained and thinned out the country’s current accounts, ultimately stressing the balance of payments.

High inflation is expected to put pressure on the country’s fiscal and current account balance but credit rating agencies said monetary tightening is easing the impact in emerging eco-nomies like the Philippines.

Credit agencies have been concerned that after a long benign period, central banks are refocusing their attention to inflation as rising prices added more pressure to the squeeze for both households and corporations.

Credit rating agencies said the decline in disposable income, potential increase in unemployment and higher costs of items ranging from food to utilities were “crimping household spending” which had been the principal macroeconomic driver of demand.

For businesses in particular, the downside of higher inflation may to result in compressed corporate margins since inflation increases the cost of production without allowing producers to pass the increase to their end-users.

Earlier, Standard & Poors said the risk was also higher for investors in fixed-rate instruments since their margins would shrink if not disappear altogether, eaten up by higher prices.

According to S&P, there were factors that used to firmly anchor inflationary expectations were no longer as effective. These include high productivity and greater integration into the global economy of low-wage, low-cost countries like China and India.

“The credibility of central banks is seen increasingly at risk in both developed and emerging markets,” S&P said.

In emerging markets such as the Philippines, years of high economic growth and monetary policy easing were providing a contrast to the decisions that have to be made now, when inflation rate was soaring. 

“Furthermore, subsidization of food and fuel in many countries compounds pressure by aggravating fiscal and current account balances, with its attendant negative impact on the cost of capital,” S&P said.