MANILA, December 9, 2004 (STAR) By Des Ferriols - Moody’s Investors Service is mulling a two-notch downgrade for the Philippines in February unless the Arroyo administration is able to deliver three key measures including the across-the-board increase in value-added tax and excise taxes on cigarettes and alcohol.

Sources privy to on-going talks with Moody’s disclosed that the best the country could hope for was a one-notch downgrade accompanied by a "stable" outlook.

Moody’s gave its stern warning of a ratings downgrade last month, expressing alarm over the deteriorating sustainability of the Arroyo administration’s fiscal and debt positions due to "political difficulties" in Congress.

According to sources, this was the same concern that would push Moody’s to take drastic ratings action, including the possibility of a two-notch downgrade.

Moody’s review would affect the Philippines’ Ba2 foreign-currency rating for government bonds, the Ba2 long-term foreign-currency country ceiling for bonds, the Ba3 long-term foreign-currency ceiling for bank deposits as well as the Ba2 local-currency rating of the government.

Bangko Sentral ng Pilipinas Governor Rafael B. Buenaventura refused to confirm Moody’s initial feelers but admitted that the reprieve given by Fitch Ratings earlier did not take the Philippines out of the woods.

"It only means we have until February to get the critical legislative reforms in place in order to avoid being downgraded in a big way or being downgraded at all," Buenaventura.

According to Buenaventura, the difficulties faced by the Arroyo administration in getting the excise tax measures passed could be made up for by raising the rate on the value-added tax (VAT).

"For the most part, I think credit ratings agencies are already counting on this VAT rate increase," he said.

According to a top-level source, however, even if the measures would be passed, Moody’s would retain the Philippines on its downgrade watch. If only some of these measures are passed, the downgrade would be one-notch while the outlook would depend on the quality of the measures that emerged from Congress.

Failing to pass anything at all would deliver a two-month downgrade not only from Moody’s but possibly from Fitch and Standard&Poor’s. This, the source said, would immediately impact on investments since investors depend on credit ratings to determine their investment decisions.

Buenaventura said as much, admitting that investment funds such as the California Public Employees Retirement System (CalPERS) normally disqualify countries that have been downgraded.

Moody’s announced that it was reviewing the country’s long-term foreign- and local-currency ceilings because of what it referred to as the "continued deterioration" in the country’s fiscal and debt positions.

Reported by: Sol Jose Vanzi

All rights reserved