FITCH  UPGRADES  RP  CREDIT  RATING

MANILA, February 14, 2006
 (STAR) By Des Ferriols - International credit rating agency Fitch Ratings announced yesterday it had upgraded its outlook on the Philippines’ foreign currency and local currency ratings from "negative" to "stable" due to the country’s improving fiscal and political situation.

However, the agency expressed apprehension over political uncertainties — such as the possibility of another impeachment bid against President Arroyo this year — which it said could derail the administration’s efforts to stabilize the country’s fiscal standing.

Commenting on the recent praise that the economy has been getting, the President said the people can greatly help in further improving the country’s economic and political stability.

"Apart from paying the right taxes, investor confidence would also be strengthened if our politics remains stable and peaceful instead of going back to the destabilization of last year," Mrs. Arroyo said. "If we fully enforce law and order, our country would be more politically stable and our economy more vibrant."

Press Secretary Ignacio Bunye said "the full credit for our economic gains goes to Filipino excellence and enterprise. President Arroyo has provided the roadmap for reform and the people took the wheel."

Finance Secretary Margarito Teves cautioned the people that the job of stabilizing the country’s fiscal situation is still far from complete.

"While we’re pleased that our efforts are beginning to bear fruit, we recognize that much still needs to be done," Teves said. "We will stay focused on our 2006 fiscal goals, particularly our revenue collection targets."

Fitch joined Standard and Poor’s, which upgraded the Philippines last week, although another rating agency, Moody’s Investors Service, had said it would maintain its "negative" outlook on the Philippines’ despite recent economic reforms.

"The good 2005 fiscal performance and 2006 fiscal outlook, together with the more settled political environment, warrant the change in outlook," James McCormack, head of Asian sovereigns at Fitch in Singapore, said in a statement.

National Treasurer Omar Cruz said the government will concentrate on the implementation of the expanded value-added tax (EVAT) "and make sure it is reflected in the revenue collection."

"This will open the door for a possible upgrade in the ratings," Cruz said after Fitch’s announcement.

Still, Fitch will probably keep its new rating for 18 months, McCormack said in an interview in Hong Kong after the release of the decision.

"We will look at it again in another 12 months but these kinds of issues take longer than that," he said.

The company kept its BB rating on the Philippines’ long-term foreign currency debt, two rungs below investment grade. On Feb. 9 Standard & Poor’s raised the country’s rating outlook to stable and kept its rating at BB-, three rungs below investment grade.

A stable outlook, which means Fitch is less likely to cut its debt rating, may boost investor confidence in the ability of the country — Asia’s most frequent bond seller overseas — to pay its debts.

The Philippines, which boasted Asia’s best-performing bonds in 2005, plans to sell $900 million worth of debt overseas to complete funding needs this year after the sale of $2.1 billion of debt last month.

"This is a clear vote of confidence in the country," said Roberto Juanchito Dispo, executive vice president at First Metro Investment Corp., a unit of the country’s largest lender by assets. "There is a dramatic improvement in the country as a whole, particularly the fiscal performance."

The Philippines’ benchmark 8.25-percent dollar-denominated bonds due in January 2014 yielded 2.24 percentage points more than similar-maturity US treasuries as of 10 a.m. in Hong Kong, according to HSBC Treasury & Capital Markets. The yield gap has narrowed from Friday’s close of 2.26 percentage points.

The government on Feb. 1 increased the EVAT rate to 12 percent from 10 percent, following an expansion of the tax to include sales of oil and power and other previously exempt products and services on Nov. 1.

This is expected to help Mrs. Arroyo meet her goal of narrowing the deficit to P125 billion this year, the smallest in seven years, and forestall a looming fiscal crisis.

The deficit narrowed 22 percent to P146.5 billion in 2005 from the previous year.

Fitch said the "short-term fiscal prospects have improved (but) medium-term challenges remain and public finances are still a rating weakness," adding that a "more significant fiscal adjustment" would have to be made.

It also warned that "political developments could still affect creditworthiness," citing continuing efforts to change the Constitution and a likely revival of opposition’s efforts to force President Arroyo from office on charges that she cheated to win the May 2004 elections.

Incoming Budget Secretary Rolando Andaya Jr. said the government "must protect and insulate our improving economic indicators from all this political stability."

Officials from Fitch visited the Philippines last month to assess the country’s economy. The ratings company downgraded the country’s rating one level from BB+ in June 2003, citing its rising debt.

Fitch cut the Philippines’ outlook to negative in July after the Supreme Court stopped Malacañang from changing the coverage and rate of the value-added tax. The changes were allowed on Oct. 18.

Moody’s Investors Service, which said on Feb. 10 that it would keep the country’s rating outlook at negative, is expected to upgrade the outlook by the end of the year, said John Teng, a fixed-income analyst at Nomura International in Hong Kong. Moody’s also said its rating would stay at B1, four steps below investment grade.

The Fitch decision "will reinforce the positive momentum on the Philippines," Teng said. "The market ignored the Moody’s action." Fitch or Standard & Poor’s will probably raise their junk ratings by the fourth quarter this year, he said.

The Philippines has been posting deficits since 1998 and the shortfall reached a record P211 billion in 2002. Government debt has almost tripled to P3.91 trillion in the last eight years. A third of the budget goes to paying interest on its debt.

Fitch expects the government to raise three-fourths of its P75 billion additional revenue target with its changes to the value-added tax, McCormack said.

Even with the extra revenue, the nation’s debt-to-revenue ratio is "exceptionally high" and the government will probably spend 36 percent of its total revenue this year to pay interest on its debt, Fitch said.

The government plans to cut its debt as a percentage of GDP to 56 percent in 2008 from 72 percent in 2005 and an estimated 68 percent this year, Cruz said on Feb. 6. The government also aims to balance the budget by 2008, he said. — With Paolo Romero, Bloomberg, AFP


Chief News Editor: Sol Jose Vanzi

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