(STAR) By Des Ferriols - Another major credit rating agency, Moody’s Investors Service, finally upgraded its ratings outlook on the Philippines yesterday from negative to stable, citing sustained improvements in government revenues and lower dependence on foreign debt.

Expressing satisfaction over the government’s progress in reining in its fiscal deficit as well as easing its dependence on external financing, Moody’s said the country’s credit rating now looked stable.

Moody’s was the last of four major credit rating agencies to upgrade its outlook on the Philippines since the Arroyo administration allowed an increase in the value-added tax (VAT) to close the budget gap and improve its debt profile.

Earlier this year, Fitch Ratings, Standard & Poors and the Japan Credit Ratings Agency upgraded their outlook from negative to stable after Congress passed the law that increased the VAT rate from 10 percent to 12 percent last year.

"This is definitely a vote of confidence," said Bangko Sentral ng Pilipinas (BSP) governor Amando Tetangco Jr. "It means Moody’s believes in the sustainability of the country’s economic reforms."

With stern caution against fiscal problems due to election-related spending, Moody’s said the government would have to show more improvements in its fiscal and debt ratios in order to trigger a credit ratings upgrade.

The government has been waiting for Moody’s to upgrade its outlook rating since it was the last major agency to do so, deciding in February to defer its ratings action until the Arroyo administration showed better proof that it could meet its fiscal targets.

Negative ratings outlook indicated that the Philippines was under review for a possible downgrading of its actual credit rating while a stable outlook means the country’s credit ratings were appropriate.

The Philippines had to further improve its economic performance to get a positive credit ratings outlook, which would put the country under review for an actual credit ratings upgrade.

Moody’s said the affected ratings include the B1 long-term government foreign- and local-currency ratings, the B1 foreign-currency bank deposit ceiling and Ba3 foreign currency country ceiling.

Moody’s defended its decision to defer its ratings action until the government had demonstrated that it could collect the VAT and attain its fiscal targets for 2006.

"We stated in February that a change in the Philippines’ rating outlook to stable from negative would depend on the achievement by the government of its 2006 fiscal targets coupled with prospects of further deficit reduction in 2007 and beyond," said Moody’s vice president Thomas Byrne.

"Based on fiscal performance through the first three quarters of 2006, it seems likely that the government will readily meet its deficit reduction target for the year as a whole," Byrne said.

"Although the full-year result for expanded value-added tax (EVAT) receipts is not available, total revenue collection from tax and non-tax sources seems likely to reach the annual target," Byrne added.

The Arroyo administration had set the goal of generating P75 billion in additional revenues from the EVAT and reducing both the government and public sector deficits to 2.2 percent of GDP.

In addition, Byrne said, smaller deficits and the country’s improved external payments position have allowed the government to commence modest external debt repayment, helping to reduce its reliance on foreign-currency-denominated debt and to ease its debt burden.

"Looking forward, we believe the government will continue to face formidable challenges in strengthening its fiscal position, and deficit reduction may not be as readily achievable as in the past several years," said Byrne.

Byrne also warned that political spending pressures would also increase in the run-up to the scheduled May 2007 congressional elections.

Byrne said in 2007, the government faces more pressure because of the economic necessity to try to catalyze the country’s very weak investment growth rates through public infrastructure spending.

"Exceptionally large increases in revenue generation achieved through reform and administrative tightening may have run their course," said Byrne.

"Political will on the part of the administration and strong support in Congress will be necessary for the Philippines to sustain its recent accomplishments," he said.

Despite the improvements, however, Moody’s was quick to point out that the Philippines remained highly indebted compared with its rating peers.

Moody’s said it expected the government’s debt-to-GDP and government debt-to-revenue ratios to remain at levels elevated well above the average of other similarly-rated countries.

Moreover, Byrne said interest payments on debt were expected to continue to absorb more than 30 percent of government revenues this year and next year, despite the fall in domestic interest rates and a stronger exchange rate in 2006.

"For the rating to move up, there will need to be continued significant deficit reduction and decreased reliance on external financing by the public sector," said Byrne. "Ultimately, debt ratios will need to be reduced from their current high levels and will need to move much closer to levels consistent with Ba-rated countries."

On the other hand, he concluded, relapse in fiscal discipline or macroeconomic instability that leads to the disruption in the government’s access to debt markets or to renewed volatility in the exchange rate or interest rates would be bad for credit developments.

Chief News Editor: Sol Jose Vanzi

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