MANILA, September 21, 2004 (STAR) By Des Ferriols - International ratings agency Fitch Ratings warned yesterday that the country could face further credit downgrade if the government fails to deliver fresh revenue measures within the next few months.

President Arroyo has asked Congress to pass a package of tax measures to raise annual government revenues by P80 billion, warning the country risks a calamitous debt default otherwise.

Fitch said a swift implementation of these tax measures would be necessary to avoid a change in the country’s outlook, now rated as "stable."

A ratings downgrade would raise borrowing costs for the government, which relies on debt to plug a national budget deficit expected to reach P198 billion or 4.2 percent of gross domestic product (GDP) this year.

Fitch said investors were momentarily unnerved when President Arroyo admitted that the country was in "fiscal crisis" but the measures that have been initiated towards fiscal consolidation have abated these fears.

House Speaker Jose de Venecia warned last week Congress would at most be able to pass only four revenue measures this year, two of them tax amnesty laws.

Fitch estimated the new laws, including adjustments on excise taxes on cigarettes and liquor, and a franchise tax on telecommunications companies, would raise annual revenues by only between P20 and P35 billion.

According to Fitch, the main source of worries had been the escalation of losses at the state-owned power company. But the credit rating company said that the recently-approved increase in energy tariffs would strengthen Napocor’s position.

"The government’s commitment to fiscal consolidation is also reflected in the submission of a package of tax increases that would raise revenues by 1.8 percent of GDP," Fitch said in a report.

Fitch said that strong nominal GDP growth and current account surpluses still underpin its BB-Stable rating for the Philippines.

"But swift implementation of the tax increases will be necessary to avoid a change in the outlook," Fitch said.

Credit ratings are normally accompanied by an outlook of either negative, stable or positive. If the country’s outlook is changed into negative, it would be a clear indication that a ratings downgrade was in the offing.

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.

Napocor’s debts were expected to add between P30 billion and P40 billion to the annual interest expense and this was not covered in the 2005 national budget.

If no new revenues would come in this year and the first semester of next year, the Bangko Sentral ng Pilipinas (BSP) earlier warned that 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.

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).

Reported by: Sol Jose Vanzi

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