MANILA, June 2, 2005
 (STAR) By Des Ferriols - Global ratings agency Standard & Poor’s (S&P) said yesterday the Philippines is highly vulnerable to interest rate fluctuations, warning that the government should frontload its debt stabilization program ahead of rising global interest rates.

S&P said it will keep its BB-minus rating and stable outlook on the Philippines until fiscal reforms translate into lower debt and higher revenues.

On Friday, Fitch Ratings raised its sovereign outlook on the Philippines to "stable" from "negative," saying the recent reforms by the government are likely to cut chronic budget deficits.

S&P associate director of sovereign ratings Agost Benard told reporters yesterday that the credit rating agency had adopted a "wait and see" attitude, holding off any action until the government’s fiscal reforms translate into lower debt burden.

According to Benard, the country’s large debt burden continued to make the Philippines highly vulnerable to high interest rates and exchange rate volatility.

"The fiscal reforms achieved so far have set the stage for improvements in fiscal position but it remains to be seen how these policies are going to be implemented and how the revenues are going to be actually allocated," Benard said.

S&P downgraded the Philippines by one notch in January, to three notches below investment grade with a stable outlook, citing delays in crucial fiscal reforms.

Moody’s Investors Service delivered a more severe cut in February, to four notches below investment grade with a stable outlook, saying there were risks from the country’s large debt.

"Ratings are appropriate where they stand at the moment," Philippe Sachs, an S&P associate for sovereign and international public finance ratings said.

The Philippines, Sachs said, had a higher debt burden than many of its peers in the BB ratings category, as well as a far larger percentage of revenues dedicated to debt servicing.

"It is more susceptible to a host of factors that are outside the immediate control of the Philippine government – and that is exchange rate dynamics and interest rate dynamics," Sachs said.

S&P was encouraged by some of the reforms but the passage of the measures, in itself, was not likely to prompt a ratings review, said Benard, .

"If we see a concerted effort more towards debt reduction, certainly that would be a positive factor," Benard said.

The Philippines, Asia’s most active issuer of sovereign debt after Japan, had a rare budget surplus in April of P3.3 billion, the first in four years, helped by record collections by the main tax agency.

But the government has allocated a third of its budget this year to service its $75.3 billion in foreign and domestic debt.

President Arroyo recently signed a critical reform measure that expanded the national sales tax by ending exemptions on sectors including power and fuel.

The government, battling rampant corruption and evasion, hopes the broader value-added tax (VAT) will be instrumental in cutting its projected $3.4 billion budget deficit this year.

The new law also raises the corporate income tax rate to 35 percent from 32 percent for three years and gives Arroyo the power to hike the VAT rate to 12 percent from 10 percent from January 2006.

Other reform measures passed by Congress raised "sin taxes" on tobacco and alcohol, and set up a carrot-and-stick scheme to improve efficiency at the main revenue collection agencies.

The government plans a no-deal roadshow in Europe and the United States this month as it prepares to complete its foreign borrowing for this year.

It has programmed $3.1 billion in new foreign debt issues and $900 million worth of loans from official donors in 2005.

So far, the government has raised $2.25 billion from the international debt market this year, with last month’s issue of $750 million in global bonds almost eight times oversubscribed.

Reported by: Sol Jose Vanzi

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