Q and A: Credit Upgrade?! What it is?

Hello Guys!

Yesterday, we received news that Moody’s is undergoing a review for a possible upgrade for the Philippines. Click here for the news.

Earlier this year, we already received a couple of upgrades from the other credit rating agencies namely Fitch and Standard and Poor’s.   I received several questions regarding the upgrades and its effect to the country and its economy.   

So for this week, I will share my thoughts about the credit ratings.

What is a credit rating?

In its simplest terms, a credit rating is score or assessment of credit worthiness or the ability of the entity to meets its obligations. The entity may include but not limited to a corporate or a government.  It can be higher or credit worthy or lower or risky.

Who are the agencies allowed to do the ratings?

The entities responsible are the rating agencies.  These are independent groups responsible for analyzing the particular country or company’s ability to meet its obligations, risk profile, growth and other developments.  The three major credit ratings agencies in the world are Fitch, Moody’s and Standard and Poor’s.

How the credit agencies evaluate their ratings?

The agencies evaluate the ratings not only using the plain math but also analyzing qualitative characteristics of the entity like its future growth and profitability.

What is the effect of credit ratings?

Higher credit ratings means the entity or country have a good standing and can sustain its growth and steady economy.  As result, the entity or country can fund or borrow with lower rates to fund its future projects and developments.  On the contrary, if the entity or country receives low credit rating, its borrowing cost is higher as the lenders are taking more risks and uncertainty in a not so stable economy.

What is the effect of the upgrade for the Philippines?

For the economy, it is good as it will enable us to fund government future projects with lower rates.

For the people, more job opportunities as the upgrade will allow other investors to come in and invest in the country. 

For the investors, It is more fun in the Philippines!