MANILA,  January 9, 2004 (STAR) By Des Ferriols - The government would likely get a two-notch downgrade from Moody’s Investors Service due to the extreme impact of criticisms that the country is in a fiscal crisis, making its debt levels unsustainable.

Sources privy to the on-going Moody’s evaluation revealed that the downgrade was "almost a foregone conclusion" and the only issue being decided was whether the downgrade would be one or two notches.

Moody’s is reviewing its Ba1 foreign currency rating for government bonds; the Ba1 long-term foreign currency country ceiling for bonds; the Ba2 long-term foreign currency ceiling for bank deposits as well as the Baa3 local currency rating.

The ratings agency is expected to release its official ratings on the third week of January and sources told reporters yesterday that a two-notch downgrade is a distinct possibility.

Sources said the prevailing political noise was seriously aggravated by concerns over the country’s debt levels, made even more problematic by the controversial statement made earlier by former Finance Secretary Jose Isidro Camacho.

In two separate occasions, Camacho made public statements that the country was in a fiscal crisis and that current debt levels were unsustainable.

Although government officials have repeatedly bellied the statements, sources said Moody’s analysts are wary that Camacho’s statement stemmed from information that he had been privy to as Finance Secretary.

"The problem is that Camacho was never one to make blithe remarks of that sort so when he said it on two separate occasions, it made people think that maybe he knew something that others didn’t," said one source who requested anonymity.

Should Moody’s decide on a two-notch downgrade on Philippine borrowings, its Ba1 long-term foreign currency bond rating would fall to Ba3.

Under Moody’s definitions, Ba bonds are instruments with speculative elements and uncertain future. A Ba3 rate would put the instrument at the lowest end of the generic Ba category.

The country’s local bonds were rated slightly higher at Baa3 which are defined as bonds that are neither highly protected nor poorly secured. A two-notch downgrade of these instruments would put the country’s local currency bonds into the Ba category.

"Right now, what we are hoping for is a one-notch downgrade although it’s still possible that we wont be downgraded at all," the source said.

The source said that although the Moody’s team that visited the Philippines might have been swayed by meetings with local companies that were still bullish about their prospects, the actual decision was not entirely up to them.

"Even if they vote against a downgrade, what about the other four who would vote?" the source said.

Before sending its team to the Philippines, Moody’s had expressed concerns that the political uncertainties were beginning to have adverse consequences on the government’s financial position and the country’s economy.

Despite the progress made in tax collections, Moody’s said the Arroyo administration is still heavily dependent on borrowing to finance its deficit and this is creating more weakness in its ability to meet its huge and still growing obligations.

Moody’s has already downgraded its outlook on all of the country’s long-term ceilings and ratings since September, giving it a negative outlook rating which placed the country as a candidate for a ratings downgrade.

According to Moody’s, its review will assess the resiliency of the external payments position and the ability of the administration of President Gloria Arroyo to maintain fiscal discipline as it copes with heightened political uncertainties.

Moody’s said that 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 the May presidential election approaches.

"While the authorities have maintained official foreign exchange reserves at a prudent level, they have had to rely on external borrowing to bolster reserve holdings," Moody’s said in a statement.

The rating agency says the status of its foreign currency ratings will depend on the ability of the Philippines to maintain an adequate level of strength in the country’s external performance and payments position.

Reported by: Sol Jose Vanzi

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