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By Lailany P. Gomez, Reporter
STANDARD and Poor’s (S&P)
on Friday said it is keeping its current credit score of
below-investment grade or junk on the Philippines, adding that this
rating would likely persist in the next six months to a year.
A below-investment grade or junk
rating means that a borrower – in this case, the Philippine
government – would have to bear higher interest rates whenever it
taps the bond market for its financing needs.
In a statement, S&P said it
affirmed the Philippines’ ‘BB-‘ long-term and ‘B’
short-term foreign-currency sovereign credit rating.
The rating company also affirmed
the ‘BB+’ long-term and ‘B’ short-term local-currency credit
score on the country.
S&P bestowed a stable outlook
on these ratings.
The rating firm rates borrowers
on a scale from AAA to D. Intermediate ratings are offered at each
level between AA and CCC (for example, BBB+, BBB and BBB-). An
intermediate rating that hovers on BB indicates a borrower is more
prone to changes in the economy.
The outlook “balance[s] the
external strength and relatively low vulnerability of the banking
sector against the Philippines’ long-standing fiscal weaknesses,
which have been accentuated by the effects of the global economic
downturn,” S&P said.
“Resilient remittance inflows,
which rose 2.6 percent in the first four months of 2009, combined
with growing surpluses in service exports and prudent exchange-rate
management, ensure a safe level of external reserves. And they have
managed to do so in the face of drastic recent contractions in
foreign direct investment and portfolio inflows,” Takahira Ogawa,
S&P credit analyst, said.
The credit-ratings firm noted
that the country was exposed to only moderate short-term risk
compared with its peers in the same rating category.
“We project [the Philippiens’]
gross external financing requirements at 78 percent of usable
reserves plus current account receipts. We also expect its usable
reserves to cover short-term debt with residual maturity 3.2
times,” Ogawa said.
The ratings drew support from
country’s resilient external accounts, whereby an improving
liquidity position continues to lower external liquidity risk even
against the backdrop of an extremely challenging external
environment.
S&P said the rating is also
supported by the low level, and low likelihood of realization of,
contingent liabilities posed by the domestic banking system, given
the absence of features that caused collapses and necessitated
government bailouts in numerous other countries.
System-wide asset quality and
capitalization may deteriorate slightly from 2008 levels of 4.2
percent non-performing loans and a capital adequacy ratio of 14.6,
the rating firm said.
However, potential worsening is
likely to be capped by the absence of rapid credit growth and
comfortable liquidity, it said.
“These factors are balanced
against ongoing risks regarding the inadequacy of the revenue base
and slow progress in addressing this, as well as questions over
collection efficiency and policy response in the current economic
downturn. Although to a large extent the sharp fall in fiscal
revenues this year can be explained by cyclical factors, much of it
was predictable. Offsetting measures on the revenue side that could
have moderated the fiscal slippage were not forthcoming,” Ogawa
said.
S&P, however, noted that the
May 2010 national elections may create moderate volatility and pose
a distraction to policy making and implementation.
“But in our opinion, there is
only a limited risk to policy continuity. Nevertheless, the
resulting delay in passing and implementing fiscal reform measures
currently in the legislature could re-ignite concerns over the
medium-term fiscal trajectory,” the rating firm said.
It said the outlook could be
revised to positive if the government showed evidence of a renewed
focus and commitment to fiscal consolidation and improvement in
revenue collections.
“By contrast, the outlook would
change to negative if indications emerge that the deterioration
currently experienced in revenue performance and fiscal balance
outcomes is not a transitory phenomenon, either because of weakening
commitment to fiscal prudence, or due to policy paralysis in a new
administration,” Ogawa warned.
Finance Secretary Margarito Teves
said the government welcomes S&P’s latest credit action.
“We believe that this serves as
a vote of confidence in the resiliency of the domestic economy
having withstood the worst impact of the global crisis,” he said.
“We will vigorously pursue our
action plans at the [Bureaus of Internal Revenue and of Customs] to
expand taxpayers’ data base in improving collection efficiency. We
are hopeful that Congress will support our proposed revenue
enhancement measures, which should help us in improving our credit
outlook to positive. This will also allow us to raise sustainable
revenues that are needed to support continued economic growth,” he
added.
The Arroyo administration’s
budget deficit ballooned by 556 percent in the first five months
this year, as expenditures to prop up the economy outpaced tax
collections.
Economic managers earlier cut the
country’s growth target to between 0.8 percent and 1.8 percent
after the sharp slowdown in the first-quarter to 0.4 percent.
They also raised the budget
deficit ceiling to P250 billion, or 3.2 percent of gross domestic
product (GDP), from the earlier P199 billion, or 2.5 percent of GDP.
An indicator of economic
performance, GDP measures the value of final goods and services
produced in a country, while the deficit-to-GDP ratio indicates how
long a government can sustain revenue shortfalls.
To plug its deficit, the
Philippine government has lined up a number of options to raise
funds, including a plan to borrow in the Japanese debt market
through the issuance of so-called Samurai bonds or IOUs, and the
possible issuance of so-called ROPs or Republic of the Philippines
sovereign bonds.
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