, February 17, 2005
 (STAR) By Des Ferriols  -  Despite the administration’s efforts to enact fiscal reforms, Moody’s Investors Service implemented a devastating two-notch cut in the country’s long-term foreign and local-currency ratings yesterday due to concerns over the large buildup of government debt.

The peso dipped to 54.88 to the dollar from 54.69 on Tuesday and stock prices gave up hefty early gains moments after Moody’s announced its decision.

The ratings cut followed a series of bombings in Metro Manila, Davao and General Santos City that claimed 12 lives and wounded 145 others.

Moody’s action was more dramatic than a recent decision by Standard & Poor’s, which cut the country’s sovereign ratings by just a notch last month owing to the same fiscal concerns.

A one-notch downgrade adds between 1.0 and 1.5 percentage points to the interest charge on government-issued debt, according to the Bangko Sentral ng Pilipinas (BSP).

Moody’s lowered Manila’s foreign-currency rating for government bonds to B1 from Ba2, the long-term foreign-currency country ceiling for bonds to B1 from Ba2, the long-term foreign currency rating of the government to B1 from Ba3, and the local currency rating of the government to B1 from Ba2.

The outlook on all the ratings is stable. Moody’s local-currency guideline remains A1.

The downgrade came as a shock to the Arroyo Cabinet but did not surprise monetary officials who have been urging the government to frontload its fiscal reforms to ease its development spending.

"I am not surprised but I’m very disappointed," said BSP Governor Rafael Buenaventura. "It just shows that we should continue with the reforms and that we have started to prove them wrong."

Finance Secretary Cesar Purisima said the rating downgrade is "too severe" but insisted that "the market has priced this in."

Moody’s said the downgrade was "owing to concerns that the large build-up in government and external debt introduces heightened vulnerability to shocks despite recent efforts by the government and the legislature to enact fiscal reforms."

It cited slow progress in President Arroyo’s efforts to shore up state finances. Congress has so far passed only one of a set of tax reform bills she submitted last year that aimed to raise government revenues by P80 billion ($1.46 billion) annually.

Moody’s said "progress in enacting reform is proving difficult as the President’s majority coalition in Congress grapples with politically painful choices."

While there have been tax collection improvements, "public-sector borrowing requirements will remain large even with more progress in fiscal reform, leaving the Philippines vulnerable to economic, financial, and political shocks, as well as to sudden changes in market sentiment."

It urged Manila to rapidly adopt a "front-loaded government fiscal reform program coupled with the elimination of operating losses and more progress in the long-delayed privatization of the National Power Corp."

It noted that even with the successful adoption of these reform measures, "It will take some time for the Philippines to reduce its public-sector debt overhang to levels compatible with higher ratings."

Purisima said, however, that Moody’s did not consider developments over the past few months, including ongoing deliberations on the proposed amendments to the value-added tax (VAT) structure as well as measures to help increase revenues, which he claimed have led to a 6.1-percent growth in gross domestic product (GDP).

Moody’s pointed out that it did take into consideration the recent reforms undertaken by the government but said their political ramifications did not inspire confidence.

"The rating agency notes that some improvement in tax collections has reversed the decline in the ratio of revenue to GDP, yet the broader public-sector debt ratios (government debt to GDP and government debt revenues) remain well above those of countries with similar ratings," it said.

The Philippines’ public sector debt stands at 110 percent of GDP and the government spends nearly 40 percent of its revenues on interest payments.

Due to its reliance on foreign borrowing, "fiscal performance has a direct effect on the country’s external payments position," Moody’s said.

"In the years since the 1997 regional financial crisis, the Philippines, unlike other countries in the region, has not been able to attract substantial amounts of foreign equity investments and instead has relied heavily on foreign debt for public-sector and balance-of-payments financing.

Moody’s also expressed concern over the bombings, which called into question the security situation in the country. "Ongoing political and social unrest also undermines efforts to reestablish confidence," it said.

"The stock market may have managed to stand up after the first blow but the second one was too much," said Jose Vistan of AB Capital Securities, referring to the bombings and the credit rating action.

After trading at five-year record levels early yesterday morning, the Philippine Stock Exchange composite index closed 11.62 points or 0.56 percent lower to 2,078.48.

Moody’s Investors Service is a widely used source for credit ratings, research and risk analysis. It also publishes market-leading credit opinions, deal research and commentary. – With AFP

Reported by: Sol Jose Vanzi

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