EXPLAINER: What are credit ratings?

Credit ratings are similar to financial report cards and indicate how likely a borrower, such as the Philippines is able to repay its debts.

Credit watchers such as Fitch Ratings, Moody’s, and S&P Global Ratings provide their ratings using letter grades, which investors then use to decide where to invest their money.

A higher credit rating is seen as more favorable, as this indicates a better perception of lenders. Different credit watchers use different letter grade scales — “D” as the lowest and “AAA” as the highest.

At present, the Philippines is scored “BBB” by both Fitch and S&P, and “BAA2” by Moody’s. S&P, the largest of the "big three" credit ratings agencies, has also lowered its outlook for the Philippines to "stable" from "positive."

A higher credit rating translates to lower interest rates for issuers such as the government.

Below is how the S&P ratings works:

• AAA - The country has “extremely strong” capacity to meet its financial commitments. Countries with AAA ratings include Australia, Canada, and the Scandinavian countries of Denmark, Norway, and Sweden.
• AA - The country has “very strong” capacity to meet its financial commitments. Countries with AA ratings include the US (AA+), South Korea (AA), and Czech Republic (AA-).
• A - The country has “strong” capacity to meet its financial commitments but is more susceptible to the adverse effects of changes in circumstances and economic conditions. Countries with A ratings include Japan (A+), Chile (A), and Malaysia (A-).
• BBB - The country has adequate capacity to meet its financial commitments, but adverse economic conditions or changing circumstances are more likely to weaken its capacity to meet those commitments. Countries with BBB ratings include the Philippines (BBB+), Indonesia (BBB), and Oman (BBB-).
• BB - Major ongoing uncertainties or exposure to adverse business, financial, or economic conditions could lead to the country’s inadequate capacity to meet its financial commitments. Countries with BB ratings include Vietnam (BB+), Brazil (BB), and Turkey (BB-).
• B - Adverse business, financial, or economic conditions will “likely impair” the country’s capacity or willingness to meet its financial commitments. Countries with B ratings include Bangladesh (B+), Egypt (B), and Iraq (B-).
• CCC - “Vulnerable” and dependent on favorable conditions to meet its financial commitments. Countries with CCC ratings include Sri Lanka (CCC+), Argentina (CCC), and Bolivia (CCC-).
• CC - “Highly vulnerable” to nonpayment, and default is expected to be a virtual certainty. 
• SD - Has selectively defaulted on a specific issue or class of obligations but will continue to meet its payment obligations. Countries with SD ratings include Lebanon and Ukraine.
• D - Considered a general default on one or more of its financial obligations, and is expected to fail to pay all or substantially all of its obligations. 

In terms of the outlook, “positive” means a rating may be raised, “negative” indicates a possible downgrade, “stable” indicates an unlikely adjustment, and “developing” means a rating may be raised, lowered, or affirmed. — BM, GMA News