MOODY'S DOWNGRADES RP RATING; PESO SHAKY
MANILA, January 28, 2004 (STAR) By Des Ferriols - The country suffered a new economic blow yesterday as global ratings agency Moody’s Investors Service lowered its long-term sovereign rating by one notch on concerns over the government’s fiscal deficit and jitters ahead of the May presidential elections.
Pre-poll concerns sent the peso tumbling to a record low of 55.92 to the dollar in early trade as dealers awaited news of the downgrade, with the market ignoring speculation that the Bangko Sentral ng Pilipinas (BSP) had intervened to support the peso at 55.850 to the dollar.
At the Philippine Dealing System (PDS), the peso managed to recover above the 55.80 level, closing at 55.750 or 10 centavos higher than Monday’s rate of 55.850 to $1 as the market realized the new ratings were better than the feared two-notch downgrade, analysts said.
The stock market also rallied, rising 1.12 percent to a 34-month high.
The Philippines’ foreign currency long-term bonds and notes were downgraded to Ba2 from Ba1, with local-currency long-term obligations at Ba2 from Baa3. The foreign currency bank deposit ceiling was also lowered to Ba3 from Ba2.
The outlook for all the ratings concerned remained negative, leaving the way open for another cut.
Bangko Sentral ng Pilipinas (BSP) Governor Rafael B. Buenaventura said "clearly the government must address the revenue issue, otherwise continued deficit will make our debt unsustainable."
Analysts said the agency was justified in voicing concern about political uncertainty and a worsening balance of payments destabilising the economy.
"Filipino politics has become more uncertain with the approach of May’s presidential election," Moody’s said in a statement.
"The winning candidate will need to implement more vigorous policies than recent administrations have been able to pursue, to ensure the long-run stability of the country’s finances."
Markets have been unnerved by the prospect that untested film star Fernando Poe Jr could win May’s elections and replace President Arroyo, whose administration has made faltering progress towards limiting a yawning budget deficit.
The agency said the lower rating on the economy’s long-term foreign currency borrowings also reflected its worsening balance of payments position and faltering exports.
UBS currency strategist Bhanu Baweja said the country’s international reserves could become a major concern.
"If the current account falls and the capital account remains negative, then you’ll see a further drawdown on their international reserves and that is going to be quite negative for the Philippine peso," the Singapore-based analyst said.
"The downgrade by Moody’s has been talked about in the market for quite some time. It’s not unexpected," said Irene Cheung, sovereign analyst at ABN AMRO.
Buenaventura said that, since the market had been braced for worse, the peso should draw strength from the decision.
"The peso should improve, since the possibility of a two-notch downgrade was a factor for the weakness of the peso," Buenaventura said.
ABN AMRO’s Cheung said markets could still expect a Philippine sovereign issue later this year.
"The market also knows that the government has to tap the market for funding for this year, so the sovereign will still come to the market, despite the downgrade."
BSP Investor Relations Office head Corazon Guidote, said that Moody’s is expected to review the country’s ratings after the May elections, specifically to determine whether its apprehension over fiscal policies would still hold true.
"Filipino politics has become more uncertain with the approach of May’s presidential election," Moody’s said. "The winning candidate will need to implement more vigorous policies than recent administrations have been able to pursue to ensure the long-run stability of the country’s finances."
On Monday, the Asian Development Bank (ADB) warned of a financial crisis unless corrective measures were taken to contain the fiscal deficit.
"We should have preferred a better grade but this should not defer us from continuing to pursue politics to improve our performance, " BSP Deputy Governor Amando Tetangco said.
Jose Vistan of AB Capital Securities said the negative outlook on the ratings serve as a warning of a possible further downgrade in the future.
"It is as if Moody’s is saying it could have been two notches but we gave you one for now," he said.
Reported by: Sol Jose Vanzi
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