MANILA, JUNE 25, 2008
(STAR) By Des Ferriols - Global ratings agency Standard & Poor’s (S&P) reaffirmed yesterday its “stable” outlook rating on the Philippines.

S&P warned, however, that although its “stable” outlook rating is still in place, stalling fiscal corrections could lower its outlook rating to “negative”, especially if revenue erosion becomes a problem because of regressive tax legislations.

S&P released yesterday its Asia-Pacific sovereign report detailing factors shaping sovereign credit quality so far in 2008 where the Philippines emerged with the reaffirmation of its “stable” outlook rating.

S&P senior analyst Agost Benard said the stable outlook balanced the increasingly robust external liquidity and significant improvements in general government and public-sector financial performance.

“This is against continued risks to revenue and deficit targets in light of considerable inefficiencies in the collection of revenues,” Benard said.

According to Benard, the outlook could be revised to “positive” should there be evidence that revenue-generating capacity has fundamentally improved.

Benard said such improvements should be about developing a sustainable, expanded revenue base that would provide for continued fiscal consolidation and debt reduction while also allowing for ongoing capital spending.

Conversely, Benard said the outlook on the ratings could be lowered if fiscal correction was endangered by stalling reforms or weakening revenue efforts. He warned against rising fiscal deficits or meeting budget goals only through spending cuts at the expense of future growth prospects.

On the whole, however, S&P said that while many Asia-Pacific sovereigns are likely to continue to enjoy relatively robust growth, some may neglect to apply prudent policy measures to offset the potentially negative effects from slowing US economic activity and ongoing financial market turmoil.

S&P said these effects include reduced Asian exports, a decline in capital flows (foreign direct investment and portfolio), tighter credit and liquidity, volatile asset markets, and lower corporate profits and spending.

“Uncomfortably high inflationary pressures are a key short-term risk for the region, while other macroeconomic headaches also remain intense,” S&P said in the report. “These include steeply rising oil and food prices, and structural capacity constraints in energy, infrastructure, and labor supply.”

The credit rating agency said these all contribute to a less-than-ideal picture as policymakers continue to try to balance short-term growth targets against longer term structural and inflationary challenges.

But according to Benard, the country’s specific strength was its increasingly robust external liquidity, track record of resilient economic growth and on-going reforms that have alleviated fundamental fiscal weaknesses.

Benard said the country’s main weakness was its high public-sector debt stemming from a narrow tax base and inefficient public enterprises as well as the heavy, albeit easing, foreign-currency debt exposure, and consequent vulnerability to adverse exchange rate changes

Benard said that based on the first quarter growth, S&P expects the country’s gross domestic product (GDP) to expand by about 5.5 percent this year, underpinned by continued strong domestic demand and the government’s capital-spending plans.

The Arroyo administration announced that it was pushing back its balanced target to the original 2010 deadline but Benard said S&P is not expecting the budget to level this year anyway.

“The deficit is now likely to be about one percent of GDP because of increased spending on food subsidies and infrastructure,” he said. “The key issue remains that revenue collection should meet its goals and so address this long-standing deficiency.”

Chief News Editor: Sol Jose Vanzi

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