MANILA, December 7, 2004 (STAR) By Des Ferriols - London-based credit ratings agency Fitch Ratings cut its outlook on the Philippines to "negative" from "stable" but did not downgrade the main credit rating as some had feared.

The decision staves off, for the time being, the specter of heavier borrowing costs in the international capital markets for the government.

In a statement, Fitch said it had "affirmed the Republic of the Philippines’ Long-term foreign currency and Long-term local currency ratings of BB and BB-plus, respectively."

A sovereign BB rating is two notches below investment grade.

Fitch said it had "revised the outlook on both ratings to negative from stable," citing a "backdrop of sharply diminishing fiscal flexibility that leaves the public finances vulnerable to shocks."

This includes "domestic interest rate increases, exchange rate pressures or contingent liabilities emanating from the wider public sector, or from banking system weaknesses."

Fitch’s decision was received with mixed reactions by monetary officials, saying that the ratings action was a "warning shot" that indicated high expectations for government to deliver its promise.

"Essentially they’re at least giving us credit for recognizing the problem an not being in denial," Bangko Sentral ng Pilipinas (BSP) Governor Rafael Buenaventura said.

Buenaventura said there were intense talks between Fitch and top government officials but it was the successful sale of the Masinloc power plant that saved the day.

"That really made the difference, together with the decision of the Supreme Court on the conflict over mining development," Buenaventura said.

Press reports had earlier said that Fitch was preparing to downgrade the Philippines this week in the first of a series of expected moves by international rating agencies.

Such downgrades would have raised 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.

"A number of factors continue to buttress the Philippines’ creditworthiness in the near-term including a strong macro-economic performance, current account surpluses supported by hefty remittances" from the eight million Filipinos working overseas, Fitch said.

"While these considerations suggest there is some breathing space for the authorities, Fitch emphasizes that a muddle-through approach entailing a half-hearted tax policy effort would not be sufficient to forestall a downgrade."

It called on the government to reduce its debt burden and to pass much-needed revenue measures to control the public deficit.

While President Arroyo has pushed for eight major revenue measures to address this problem, Fitch observed that these measures were making slow progress in Congress and only one bill, a "sin tax" on tobacco and alcohol products, was likely to be passed this year.

Reported by: Sol Jose Vanzi

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