, April 2, 2004
By Des Ferriols - Political developments ahead of the May elections could prompt a credit rating downgrade if they worsen the economy’s condition, but a change is not inevitable, global rating agency Standard and Poor’s (S&P) said yesterday.

S&P currently has a rating of BB on the country’s foreign currency sovereign debt. It last changed the Philippines’ rating by lowering it by one notch last April, citing a rising debt burden.

"If we do think there is a candidate out there who has a significant rating impact and we see that he or she is going to win... then we can react," Ping Chew, S & P’s sovereign ratings director for Asia ex-Japan, and South Korea, said at a briefing.

Credit ratings agencies have been growing steadily wary over the anticipated outcome of the elections although all of them contended that the result was not as critical as the manner in which the election would be conducted.

S&P said that its "stable" outlook on the Philippines indicated that its present rating was "likely to remain" unless major changes would occur, especially in the fiscal position of the government.

Beyond the election-related uncertainties, S&P said the primary concern was the continued and sustained decline in the budget deficit regardless of who would win the May elections.

According to Chew, just to meet the 2009 deadline for a balanced budget would require drastic measures in terms of tax collection, tax rates and public spending.

"Some quarters will not appreciate these measures," Chew said.

The local financial markets have been worried that S & P’s current visit to the Philippines might herald a downgrade of its current rating, which is already two notches below investment grade.

Rival agency Moody’s Investor Service cut its sovereign rating on the country by one notch to Ba2 in January–also two notches below investment grade– and maintained its negative outlook.

"A downgrade is possible if the deficit widens, if the power sector problems complicates the fiscal position further, if the banking sector deteriorates and if there is derailment of economic policies," Chew said.

"All or any of these factors could lead to a downgrade, depending on the severity of the problem."

Chew said that S&P was not expecting another blow-out in the deficit but he said the pressure to stick to the deficit reduction program would persist and make the country more vulnerable.

"As long as the fiscal position is not consolidated, there would not be resources to meet infrastructure requirements or to address such needs as housing which would boost potential growth," Chew said. "More importantly, there won’t be enough resources to weather another shock, should one happen."

According to Chew, however, there was a need to flesh out the government’s deficit reduction program to convince the market that it had a clear vision of how to resolve the perennial deficit problem.

If the sovereign is aspiring for an upgrade, Chew said policies have to be "more aggressive, more coherent."

Chew and the S&P review team has already met with representatives of at least three presidential candidates but he said that while there was a clear understanding of what the problems were, the same clarity was not evident "Detailed plans and clear targets are not out there," Chew said. "We’re not in the business of advising governments on what they should do but we would like to see a fleshed-out plan."

Reported by: Sol Jose Vanzi

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