MANILA, September 20, 2004 (STAR) By Des Ferriols - The government will be facing credit ratings downgrade in 2005 if it fails to generate new revenues to service the debts of the National Power Corp. (Napocor).

After deciding to absorb some P560-billion worth of debts accumulated by the Napocor, the Arroyo administration is projecting a significant increase in its debt service costs on top of its own outstanding debt.

According to the Investor Relations Office of the Bangko Sentral ng Pilipinas (BSP), Napocor’s debts would add between P30 billion and P40 billion to the annual interest expense and this was not covered in the 2005 national budget.

IRO Managing Director Corazon Guidote told reporters over the weekend that the national budget would not be able to support this much add-on without measures that would generate new revenues beginning next year.

"If there are no new tax measures, there will be slippage in the deficit target," Guidote warned. "Are we then courting another downgrade?"

The country’s budget deficit is the most heavily-monitored leading indicator by the country’s creditors as well as credit rating agencies. The higher the deficit, the more the government would have to borrow to support itself.

Guidote said the debt burden would become even heavier, escalating to higher interest payments and further cuts in development spending.

If no new revenues would come in this year and the first semester of next year, Guidote said the chances of slippage would increase dramatically and lead almost certainly to downgrading.

At present, the Philippines is already rated below investment grade by the leading credit rating agencies such as Moody’s Ratings Services (Ba2 negative), Standard & Poors (BB stable) and Fitch (BB stable).

Low credit rating would limit the country’s access to the credit market and it would force the government to borrow at rates that it would not be able to afford or sustain.

Such a situation, according to Guidote, would be very easy to spiral out of control. "Do we really want to go that route?" she said.

The country would have to broaden its tax base and increase government revenues before it could hope for an improvement in its credit rating, Guidote said.

A survey of credit rating agencies revealed that among its peers with the same credit rating, the Philippines had the lowest revenue collection as a percentage of gross domestic production (GDP).

According to Guidote, credit rating agencies were already edgy over the country’s debt level and the only solution was to increase taxes in order to avoid heavy borrowing.

Reported by: Sol Jose Vanzi

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