RP rating still positive, says Lehman Bros

US-based investment bank Lehman Bros. said the country's credit standing remains relatively positive despite various economic setbacks.

"Our assessment of the Philippines' sovereign credit quality is little changed from previous years," Lehman Bros. said in its latest Sovereign Update Research.

The firm said the resilience of the Philippine economy has provided the "foundation for a bullish investment thesis on the country's international bonds," adding that "these supportive fundamentals deserve greater attention than they have been getting amid the market dislocation."

Aside from this, Lehman said the country is not heading for any liquidity crisis.

It said based on estimates made by the Institute of International Finance, a private forecaster, the country's interest rate payments and amortization on external debt as a percentage of exports of goods and services plus net transfer--the debt service ratio--will be 14.8 percent in 2000.

According to the investment bank, this level is slightly higher that the Department of Finance's (DOF) implied debt service rating of 14.7 percent and inline with the 1994-1999 average ratio of 15.1 percent.

"These levels compared favorably with other Emerging Markets issuers," the firm said.

The firm expects debt amortization to hit $5.3 billion this year, which compares quite favorably with usable foreign exchange reserves of $4.1 billion at end-March.

The current account surplus is expected to reach $6.1-billion net of interest payments this year, after a surplus of $6.7 billion last year.

However, it warned that the current crisis in Mindanao might affect the credit spread of Philippine papers.

"Regrettably, that sort of decisive action seems confined to senior Cabinet ministers, although cynics might argue that the president's decision to confront Muslim separatist kidnappers rather than negotiating is a telltale sign," it said.

The firm noted that uncertainty about political stability is often more influential on credit spreads in developing countries than economic fundamentals.

It cautioned the Estrada administration that these political problems would take its toll on the country's sovereign issuances in the future if the government would not do anything about it.

"Barring the kind of unforeseen incidents that seem impossible to predict today, President Estrada's term will last until 2004. If his actions and demeanor remain out of favor with investors, the Philippines could face stiffer borrowing costs for the remainder of his term," it said.

However, it said the Philippine debt service is quite manageable to begin with, so a continued loss of confidence and persistent budget overruns would be necessary to produce a major impact on sovereign credit quality.

"We think investors' concerns about the Philippines can be abstracted into one primary worry: that government mismanagement will undermine the country's fiscal position, sending it back in the market haphazardly and the long end of the yield curve, as has been the case in the past," the research company said.