MANILA, Philippines – Even with a looming interest rate hike in the US, the Philippines has enough room to lower interest rates further which should benefit the private sector through cheap credit next year, the country’s finance chief said.
“We still have opportunity to continue to bring down the borrowing rates of the country,” Finance Secretary Cesar Purisima told The STAR.
While “everyone will get affected” once the US Federal Reserve raises interest rates, Purisima said the country still “has room” to pull down borrowing costs given its strong macroeconomic fundamentals.
For instance, the average interest rate of existing state debts is at 5.11 percent as of September, Bureau of Treasury data showed. Purisima said this is much higher than the “a little over four percent” being charged now by investors on Treasury papers.
The US Fed is highly anticipated to make its first interest rate hike in nearly a decade next month as the US economy showed consistent signs of recovery from the global financial crisis in 2008.
Investors, as a result, have punished emerging markets such as the Philippines by fleeing to the world’s safe haven, driving interest rates up and causing volatility in the financial markets.
“Even if rates go up by half a percent, I still have room to bring it down. And then if I continue to improve my credit rating, then my own rating vis-à-vis the US will narrow,” Purisima said.
“The spread between the Philippines and the US (papers) will narrow,” he pointed out.
The country earned 22 credit rating and outlook upgrades during the Aquino administration, and the Finance chief said it is ripe for another one before it leaves office next year.
Higher credit ratings, in turn, is rooted on the Philippines’ stable economic growth for the past five years, ballooning dollar reserves, and favorable demographics. Purisima said it is high time for the country to be upgraded again.
“If the ratings of other sovereigns are correct and our CDS (credit default swaps) showing that it’s tighter, then the market is saying that we’re closer to A (rating),” he stressed.
CDS pertains to the insurance the investors ask from holding any other country’s debt instead of US Treasuries. According to Department of Finance data, Philippine CDS is at 123.52 basis points versus US Treasuries as of August this year.
The country’s CDS spread is narrower than that of Thailand and Malaysia, which are rated higher than the Philippines. The country ranks BBB, Baa2 and BBB- under the metrics of Standard & Poor’s Ratings Service, Moody’s Investors Service and Fitch Ratings, respectively.
Purisima said higher ratings does not only benefit the government, but also the private sector.
“So long as we improve the sovereign ceiling, they will have the opportunity to benefit from our work and all of them will have access to better rates,” he said.
“If we continue to improve our fundamentals, the CDS will continue to narrow and that should offset the interest rate increase,” he added.