No upgrade, ratings outlook stay — S&P

04/19/2008

International ratings firm Standard & Poors (S&P) Ratings Services denied any upgrade either in the credit rating or the outlook on the country saying that despite the improved fiscal condition of the country, it remained vulnerable to policy shifts and economic shocks.

S&P, nevertheless, affirmed its three notches below investment grade rating on the country or “BBB” on foreign currency and “BB+/B” local currency sovereign credit ratings. It retained a stable outlook on the country.

S&P stated the ratings reflect the sharply improved external liquidity position in the country. Fiscal consolidation efforts and attendant decrease in external borrowing combined is ameliorating one of the key vulnerabilities of the sovereign, given that over 40 percent of its debt is denominated in foreign currency.

The ratings also took into account continued efforts to increase tax revenues from a low 14-percent of gross domestic product (GDP) and the country’s track record of steady economic growth, it added.

“Despite these advances, a number of key debt ratios reveal a still-high level of vulnerability to economic shocks or adverse policy shifts than what is generally associated with this rating category,” S&P credit analyst Agost Benard said.

The country’s total public sector debt at 64.3 percent of GDP last year is well above the “BB” median 38.5 percent while debt-to-revenue ratio of 345 percent, against the “BB” median 146 percent, points to much weaker debt service capacity.

In addition to the high public leverage, the low revenue base is also a key reason behind an extended period of meager public investment, Benard said.

“This left the Philippine economy with inadequate infrastructure, unable to fully exploit growth opportunities,” he said.

“The stable outlook on the rating balances increasingly robust external liquidity and significant improvements in general government and public sector financial performance, against continued risks to revenue and deficit targets in light of weak collection efficiency, “he added.

Benard said the outlook could be revised to positive on evidence that revenue-generating capacity has undergone a fundamental improvement.

The outlook, however, could be lowered if fiscal correction is endangered by stalling reforms or weakening revenue effort, such that fiscal deficits begin to rise, or that budget goals can only be met through continued expenditure compression at the expense of future growth prospects, he said.

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