MANILA, January 18, 2005 (STAR) By Des Ferriols  -  Standard and Poor’s downgraded yesterday the country’s sovereign credit ratings, citing the government’s failure to shore up its shaky public finances.

"The downgrades reflect the government’s inadequate response to its fiscal problems," the international ratings agency said.

"With public sector debt at 110 percent of gross domestic product (GDP) and government interest expense at nearly 40 percent of revenue, prompt passage of the government’s fiscal plan was necessary to support the Philippines ratings at their previous levels," S&P said.

The country’s long-term foreign currency rating was cut one notch to BB-minus from BB and its long-term local currency rating to BB-plus from BBB-minus.

S&P also lowered the country’s short-term local currency rating to B from A-3 but affirmed its short-term B foreign currency sovereign credit rating. The outlook is stable.

The latest downgrade was the third negative ratings action under the Arroyo administration after Fitch Ratings cut its ratings in 2003 and then again downgraded its outlook in 2004.

S&P credit analyst Agost Benard said S&P "has now revised downward its expectations that the government will be able to raise tax receipts materially from their current low level of 12 percent of GDP and that the governments debt trajectory will move to a clear downward trend."

President Arroyo asked Congress last year to pass a series of revenue enhancement measures to avoid a potential fiscal crisis in three years’ time.

However, only one measure, on tobacco and liquor products, has been passed so far and that in what the rating firm described as a "watered-down version."

Half the country’s debt is in foreign currency, exposing it to the risk that rising global interest rates or a weakening peso would "sharply limit policymakers room to maneuver."

Benard said the stable outlook "reflects the more comfortable rating relativities at this lower rating level at which the Philippines weak fiscal and debt profiles are balanced by the country’s external position."

"Total public and private sector external debt at year-end 2005 is projected to be less than 120 percent of current account receipts and the Philippines 2005 gross external financing requirement should equal only 77 percent of unencumbered net official reserves.

"Coupled with modest success in enacting some of the governments fiscal measures in the upcoming legislative session, Standard and Poors sees the upside and downside risks to the Philippines new ratings as balanced," Benard added.

Although the downgrade has been expected since late last year, Philippine economic officials still expressed surprised that S&P announced the downgrade without conducting the usual consultations.

Finance Secretary Juanita Amatong expressed disappointment at S&P’s action, complaining that the agency "did not come to the Philippines for its annual review."

"Neither did they give a warning prior to this rating action," Amatong complained, adding that the Arroyo administration was confident that S&P would revisit the rating and consider reversing its action.

Bangko Sentral ng Pilipinas (BSP) Governor Rafael Buenaventura expressed surprised but he was more pragmatic with S&P’s misgivings, saying that part of the agency’s reactions were at least understandable.

"I’m a bit surprised myself that a rating came out prior to a formal review," said Buenaventura. "But it is a statement of disbelief that the government will be able to deliver its P80- billion revenue package."

Buenaventura said S&P was "seriously discouraged" by the opposition to the tax measures and the shifting proposals that keep reaching the table before any decision is even made on pending measures.

"The question they are asking is whether the administration can collect P80 billion or not," Buenaventura said.

Buenaventura pointed out that while the government has been able to contain its deficit, it had been at the expense of much-needed development spending.

"Now we have to increase revenues in order to address the real problem behind our mounting deficit," Buenaventura said.

Buenaventura said S&P’s downgrade showed "a degree of impatience on their part" although the "stable" outlook reflected the agency’s acknowledgment that the government made some headway in balancing the budget and plugging its spending loopholes.

"We avoided a two-notch downgrade from S&P because we did a good job with fiscal management last year," Buenaventura said. "What they are saying now is that is not good enough, moving forward."– With AFP

Reported by: Sol Jose Vanzi

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