The S&P upgrade: a caveat

(Part 2)

IT GOES without saying that the Standard & Poor’s (S&P) credit upgrade, equivalent to two notches above the non-investment grade, is good news. It is a seal of good housekeeping — in particular, the confidence that the Philippines has the capacity to service its debt both for the short term and long term, barring any unforeseen economic shock. That translates into lower borrowing costs, which, in turn, can stimulate investments and spending.

To reiterate, S&P awarded the Philippines the long-term rating of BBB and the corresponding short-term rating of A-2 on the basis of the government’s structural, administrative, institutional, and governance reforms. The reforms extend to solid fiscal gains — higher tax effort, higher spending for social and economic services, and efficient and transparent disbursements — as well as to a healthy external balance.

Note that the S&P credit upgrade has come at a time that political jockeying and fighting are taking center stage in the run up to the 2016 national elections. Yet, S&P expresses confidence that the uncertainty associated with election outcomes will not affect the continuity of reforms.

Here’s what the S&P credit analyst Agost Benard said: “We raised the ratings because we now believe the ongoing reforms to address shortcomings in structural, administrative, institutional, and governance areas will endure beyond the current administration. In turn, we believe the resulting gains in government revenue generation, spending efficiency, and the improvements in public debt profile and investment environment will at least be preserved in the medium term under the next administration.”

Partly, S&P is correct. Any administration that follows the Aquino administration will benefit from the reforms initiated and being implemented by the Aquino presidency. Let’s assume for the sake of argument that a Dark Lord becomes the next president. Why will he reverse the tax laws and rules that have generated huge additional revenues? Why amend the sin tax law that reaped incremental revenues of P45 billion in its first year of implementation alone, a huge portion of it earmarked for universal health care?

But S&P errs when it thinks that any future administration will continue the reforms that constitute good governance. Mancur Olson’s stationary bandit — the corrupt politician who delivers goods to gain the electorate’s goodwill — will not be interested in efficiency and transparency.

A leader who thinks everyone can have a free lunch and who will dispense particularistic favors to allies will erase the gains that S&P has cited.

More to the point, a Dark Lord who coddles Tanda, Sexy, Pogi and Napoles and the whole caboodle spells disaster for governance. Such disturbance will spill over to the economy.

The point is, we have to acknowledge the big risks that political uncertainty brings. This is not to say that the Philippines does not deserve the credit upgrade. The BBB grade actually factors in the possibility of adverse economic conditions and changes in circumstances, which can affect future investment outlook. Said another way, the credit upgrade we have obtained in 2014 can be reversed, depending on the outcome of the 2016 elections.

To neutralize the possible ascendancy of a Dark Lord, it is crucial to pass the hard reforms before the end of PNoy’s term. These include a cluster of tax measures like the rationalization of fiscal incentives and the restructuring of mineral taxation and another set of open government reforms like the transparency of tax expenditures and freedom of information (or access to public information).

Laws are difficult to reverse. But even the best of laws can be undermined by a bad presidency. For instance, the Philippine Procurement Act is said to be a world-class model of legislation. But during Gloria Arroyo’s administration, this procurement law did not stop Mrs. Arroyo from allegedly circumventing the law and from pursuing onerous deals.

Which brings me to the final point: Our electorate must support a candidate for president who will continue the reforms initiated by the PNoy administration. But here’s another caveat: it cannot just be the candidate who gets PNoy’s endorsement. He or she must have the necessary attributes to defeat the Dark Lord.

(The author coordinates Action for Economic Reforms [www.aer.ph].)

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