(Photo courtesy of Movietome.com)

This week has been quite crazy on the financial front. We saw another global stock market rout last Tuesday after an intra-meeting Fed rate cut that sparked renewed fears of a US recession. At least 24 hours after, we saw global markets recover, and at weeks end yesterday, several, almost unbelievable news.

On Wednesday, we had HSBC’s visiting economist Fred Neumann saying he was not even changing his economic forecast for the Philippines despite all the talk about an impending US recession. Early on Friday, Moodys Investor Service upgraded the outlook for the Philippines to positive from stable. A few hours after, the Government Service Insurance System signed an investment agreement with two global investment banks to invest $1 billion of its funds overseas–initially. All these while markets were still cautiously recovering from the sell-offs on Tuesday.

Here’s something that can help non-financial people understand sovereign credit ratings.

When Moodys, Standard and Poors and Fitch Ratings announce something, the market is all ears. In the late 1990s, they were severely criticized for failing to spot the debt excesses of Asia’s economies. When that criticism fizzled out, markets went right back at tracking what credit rating agencies had to say.

What these firms do in a nutshell is analyze the financials of countries and corporations that issue bonds. They give out ratings that are widely assumed to be independent and objective. These debt ratings influence returns on bond investments directly, and equities investments indirectly. I saw analysts from these firms descend on government officials like Men In Black, and we financial beat reporters shadowed them like little mice. One government official told me then that credit rating agencies charge quite a hefty sum of money to analyze and give out ratings.

Here are the ratings and what they mean, in English:

Aaa/AAA – debt that belong in this category are the crème of the crop. They are considered to have the highest credit quality, meaning there is almost no chance they won’t be able to pay their debt. For investors holding instruments with this rating, that means your money is very safe.

Aa/AA – “Double A” debt is still considered to be very safe investments, but with modest risk that may change from time to time because of economic conditions.

A/A – At this level, there’s already some risk associated with ability to pay but at very low levels.

Baa/BBB – Already a little bit risky and speculative, but considered still suitable for institutional investors. Risk of not being paid is higher when the economy goes under stress.

Ba/BBB – Risky and speculative. Overall quality may move up and down frequently.

B/B – there is real risk that obligations will not be paid. Investors have to watch debt in this category closely, because the quality fluctuates widely.

Caa/CCC – bonds are in poor standing. Some are in default. Others are in danger of default.

Ca/CC – highly speculative, often in default. That means, you as bondholder, wouldn’t get paid if the borrower defaults on its obligations.

C/C – with almost no chance of ever getting a better rating.

Sometimes, you see ratings like Ba1 or Ba2. Ratings agencies use numerical “modifiers” to further refine its ratings. Also remember not to confuse credit upgrade with an upgrade in outlook. Moody’s decision yesterday, for example, was to upgrade the outlook from stable to positive, which means there is a possibility Moody’s would upgrade the country’s credit rating within 12 months if the economy shows further improvement.

A dose of financial market irony: The Philippines is considered three notches below investment grade or a very speculative investment in global markets. In Philippine markets, government bonds are considered the safest.

Why would institutional investors buy Philippine government bonds, then? Debt instruments below investment grade offer higher returns compared with bonds with A-class credit ratings. When you hear bankers saying “investors ask for a higher premium because of the higher risk,” that merely means “you have to pay me more interest because I’m not even sure if you can pay me back!”

Here’s a summary of credit ratings from different ratings issuers, courtesy of The Bond Market Association (now the Securities Industry and Financial Markets Association and Blaha.com.

(It’s going to take smart planning, skillful balancing, focus and a steady temperament to weather the global financial crisis now worrying investors all over the globe. Photo from AFP.)

Back in grade school, “recess” was something you wait for and it involved chocolates, crunchy snacks and your favorite drink. These days, you grind your teeth and develop a crease on your forehead when you think about it. Recession, I mean.

How do we go about recession-proofing our finances? Here are a few tips I have gleaned from business chatter today in media:

Diversify. Now, more than ever, is the time to consider diversifying investment instruments (and even business opportunities) in both asset classes (bonds, currencies, stocks, funds, properties, commodities) and markets (Philippines, Asian markets, Europe, Middle East etc.) Agustin Davalos, Citibank Philippines’ retail bank director, told me in a recent interview that allowing investors to put their money in other markets is a major development that would tremendously improve opportunities for individual investors.

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(Investing can feel like going through a maze. Photo: AFP)

There was a “stock market bloodbath” earlier today at the Philippine Stock Exchange as Philippine equities tracked heavy losses across financial markets all over the world on fears – again – of a US recession. For sure, business newspapers tomorrow morning will be rife with discussion on how investors are facing their worst losses in recent months and how US President George Bush’s $140 billion economic stimulus package was ignored by the world.

As I sat quietly in my home-office to digest the news after a rather busy day, and watched a leaf from my Narra tree waft lazily to the ground, the thought hit me that it hardly feels “bloodbath-ic” in here. The world looks the same as it did yesterday and the day before. It certainly still feels like 2008 hasn’t arrived yet.

Then I got a harried text message from a friend who last year invested in an equity-laced investment instrument. “I’ve lost so much money! Should I withdraw my investment?”

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(Photo from Agence France-Presse)

Malacanang has just confirmed plans to cut tariff on oil and petroleum product imports to 2% from 3%, hoping this will cushion the blow from rising oil prices overseas. Tariff, by the way, is in layman terms simply a tax on imported products. (Err, I don’t understand why they have to invent another word for “tax” heh) Wiki explains that it is the simplest and easiest way to collect taxes since it has to be paid so the product can land on shore.

Chopping off a one-percentage-point means around 35% reduction in tariff. President Gloria Macapagal Arroyo says she is hoping this will help “every Filipino family.”

Boy, do we all need that relief. We’re all feeling the pinch, wherever we are in the world. Oil has hit $100 a few days ago, just as many price watchers feared and everyone – from the balut vendor to the bigwigs at San Miguel Corp. – will have to think of a way to deal with it. Reuters came out with an interesting article that showed how a Beijing cab driver to a vendor selling food wrapped in banana leaves in Jakarta will suffer even more if oil climbs higher to beyond $100.

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(Some things you just can’t shake off like the rising peso and climbing oil prices. The sooner Filipinos accept that, the better. Photo from AFP)

Sometimes, the most effective solutions to complex problems are the simplest. Like transparency, for instance. One of the simplest ways to reduce corruption is to require government offices to regularly report audited figures on the unit cost of everything they spend public money on. As you all know, information is a currency recognized in all countries and it levels the playing field like nothing else can.

While doing research on fund transfers for an article I was writing, I was so frustrated to find so many banks holding on to remittance charges, breakdown of costs and delivery time as if these were state secrets. Some even said these were proprietary information. Duh.

The Bangko Sentral ng Pilipinas’ move to compel banks to make these data available to anyone is a good move, but I hope no one shoots me for asking, “What took so long?” I mean, no one had to revise a law or hire a rocket scientist for something as simple as a policy on transparency, right?

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Hot money, hot Pinoy seafarers (were you thinking of hot Pinoy hunks? Tsk tsk), hot business opportunities in medical tourism – everything’s hot today except the weather. We are expecting another typhoon…sigh. It’s always like that before or after my birthday. EVER since I was born 21 years ago. (Did you just do a double take?)

The Philippines attracted $274 million net “hot money” last October, the Philippine Daily Inquirer reported today. That’s quite a huge jump from $35.8 million in September, and totally deserves a blog post.

In this post,  I wrote that hot money refers to short-term investments by foreign investors in local stocks, bonds and money market instruments. While they influence the local financial market, we need to remember that they are very speculative and can leave our shores at the touch of a button. The long-term growth of our stock and bond markets, in fact, will depend on whether domestic investors (that’s you, me and our OFW friends and relatives abroad) will begin to invest in the domestic market. Policy-makers hope a wider base of domestic investors will not be as jumpy as foreigners.

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The Philippine Daily Inquirer’s top story in the business section today says “BOP surplus seen topping $7-B mark”.

Balance of payments (always with an S) is an economic jargon that simply refers to a record of all international transactions between one economy and the rest of the world in a particular period.

Doris Dumlao, in her article, further explains:

Any transaction which gives rise to a payment by a Philippine resident like importation or debt servicing is a deficit item in the BOP while any which gives rise to a receipt like borrowing, exporting or overseas Filipino worker remittance is a surplus item.

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I woke up to an ache in my chest as I read the morning paper.

Mariannet, the 12-year old child who hanged herself last Nov. 2, was my daughter’s age. She is one of 11 million Filipinos who share a strange kinship with one billion more across the globe who live on less than a dollar a day. Her diary says she killed herself because she lost hope her family will ever get out poverty. Her wish list found in her diary was short: a bicycle, a school bag and jobs for her parents.

“Gusto ko po sana magkaroon ng bagong sapatos at bag at hanapbuhay para sa nanay at tatay ko. Wala kasing hanapbuhay ang tatay at nagpa-extra extra lamang ang aking nanay sa paglalaba,” she said in her “Wish Ko Lang” letter. [I wish for new shoes, a bag and jobs for my mother and father. My dad does not have a job and my mom just gets laundry jobs.]

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I wonder how President Gloria Macapagal-Arroyo handles huge swings in emotion. If she’s not on the verge of a tantrum (Are you telling me these people from the NSCB are liars??? – additional question marks mine), she’s on cloud nine about the GNP figures.

Expect to read all sorts of analysis about the GNP and GDP figures in the coming days. I wrote about what these figures mean in this post.

Two of the smartest economists in the country, Dr. Felipe Medalla of the UP School of Economics Cielito F. Habito of Ateneo, both former socioeconomic planning secretaries, earlier this year expressed doubts on the integrity of the national income accounts. They should know what they are talking about. The National Statistics Coordination Board was once an agency under them.

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For me, it’s the law of supply and demand – the fraternal twins that move markets all over the world, the yin and yang of economics, the muggles and wizards of Potterian fantasies, the Optimus Prime and Megatron of financial markets (ok, ok…I stretched that a little bit too far. Let’s not turn one of them into the evil one). I would even go as far as to say you have no business investing your money if you haven’t conquered this idea.

Yeah, ‘conquer’ as in know it like the back of your hand. As in navigate through the concept with your eyes closed. Investors who have intimate knowledge of the tugs and pulls of consumer and producer surpluses can harness that knowledge so they don’t get whipped silly by bear markets and irrational exuberance in financial markets.

Harvard economics professor Greg Mankiw explains here how this concept is at the heart of the workings of market economies. If you crave for more readings (because you are blessedly nerd-ic), read the lecture notes from the Massachusetts Institute of Technology’s Sloan School of Management on this concept. As you read, you will see why supply and demand affects prices, market dynamics, and why its related to the Invisible Hand of Adam Smith, that long-dead white man who is, until now, still called the Father of Economics.

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