MANILA, November 27, 2003  (STAR) By Des Ferriols - Global rating agency Moody’s Investor Service placed yesterday on review for possible downgrade the Philippines’ long-term foreign and local currency ceilings and ratings amid heightened political uncertainties.

The decision came hours before Philippine movie icon Fernando Poe Jr. (FPJ) announced he would run for president, posing possibly the greatest threat to President Arroyo’s chances of winning a second term in the May 2004 elections.

The markets are expected to react negatively to the candidacy of Poe, a high-school drop-out who has never held public office and is closely linked to deposed president Joseph Estrada, who faces corruption charges.

Despite her apparent inability to rein in corruption, Mrs. Arroyo is still seen as pro-reform by the financial markets based on her performance since storming to power in a military-led uprising against Estrada in January 2001, analysts say.

Bangko Sentral ng Pilipinas (BSP) Governor Rafael B. Buenaventura said the arrival of Moody’s review team would provide the Arroyo administration the perfect opportunity to dispel the rating agency’s fears and demonstrate that the bureaucracy will continue to function despite the disruptive impact of the elections in 2004.

"There is an impression that everything is at a standstill just because there is an election in May," Buenaventura said.

"But that is not altogether true. Our commitment to keep the deficit down is intact, the bureaucracy continues to function, especially the central bank," he stressed.

Moody’s said in a statement that heightened political uncertainties had begun to have adverse consequences for the government’s financial position and the overall economy.

Its rating review affects the Philippines’ Ba1 foreign currency rating for government bonds and long-term foreign currency country ceiling for bonds and the Ba2 long-term foreign currency ceiling for bank deposits as well as the Baa3 local currency rating.

Moody’s has had a negative outlook on all of the country’s long-term ceilings and ratings since September.

The global rating agency’s review will include the resiliency of the external payments position and President Arroyo’s ability to maintain fiscal discipline, it said.

"In view of the tensions that have accompanied political cycles in the past, the nation’s fiscal policy could be handcuffed and capital outflows become more volatile as May’s presidential election approaches," Moody’s said.

"We have been saying for some time that there has been a 60 percent probability of a one notch downgrade before the middle of next year," said Tim Condon, chief economist for Asia at ING Financial Markets.

"The market has priced in a downgrade by Moody’s and I think there would not be a great deal of market impact," Condon said.

Moody’s said the status of Philippine foreign currency ratings would depend on the country’s ability to maintain an adequate level of strength in the country’s external performance and payments position.

Last week, Finance Secretary Jose Isidro Camacho resigned, saying that he did want to be dragged into the intense political climate up to the May 2004 presidential elections.

Mrs. Arroyo, who this month averted a constitutional crisis following a failed opposition-led bid to impeach chief justice Hilario Davide, has been faced with crisis after crisis in recent months.

The latest problem to afflict her is increased kidnappings involving largely the Filipino-Chinese community, who are among the top business leaders.

In July, she put down a military mutiny at the heart of Manila’s financial center, which also dampened business confidence.

Moody’s cautioned that a "continued deterioration in the political climate could further weaken the Philippines’ external payments position."

Export performance has languished this year, reducing the current account surplus and augmenting pressures on the capital account in the balance of payments.

Foreign investment inflows were on a downward trend even before the recent political disturbances.

"Confidence-sensitive investment is necessary not only for stabilizing the capital account in the near term but also for ensuring the dynamism of the export sector and boosting overall economic growth over the long run," Moody’s said.

Reported by: Sol Jose Vanzi

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