London based Fitch, said that the Philippines has to restore its fiscal credibility in the light of the domestic political timetable and fears of a global contagion stemming from the ongoing crisis in Brazil and the rest of Latin America.
At present, Fitch said the government’s failure to meet its deficit target does not threaten its credit rating outlook, but the country’s deficit and the resulting public debt made it potentially vulnerable to contagion and underscored the need for a "credible domestic macro-economic policy framework."
According to Fitch, 50 percent of the country’s public debt was denominated in foreign currency and this has made the country vulnerable to contagion, especially since the government needed at least $2 billion from the international financial market every year.
In 2003, the government plans to borrow $2.3 billion in order to finance its deficit which is expected to run up to P142 billion.
"The Arroyo administration is finding it much harder than it expected to expunge the fiscal legacy of the Estrada regime," said Fitch. "Although it remains committed to a target budget deficit of P130 billion, the chances of realizing this now are slight."
Reacting to Fitch‚s comments, Finance Secretary Jose Isidro Camacho said the government was resolved to stick to its fiscal discipline and reform, particularly in revenue collection, despite the resignation of internal revenue commissioner Rene Bañez.
According to Fitch, however, the government would have difficulty holding the deficit below P155 billion and even this would demand a significantly better revenue performance during the remaining months of 2002 as well as deep expenditure cuts.
Moreover, Fitch said the government had a limited window of opportunity to bring the public finances back on track if it wants to avoid making difficult political choices in 2003.
If the government fails to increase revenues in the second half of 2002, Fitch said this would reverse the decline in debt to GDP (gross domestic product) ratio recorded in 2001.
"Such events would complicate fiscal management next year as there would be little political appetite for consolidation in the run up to presidential elections in 2004," Fitch said.
If the deterioration in public finances were to persist through 2003 and into 2004, Ftich said the Philippines‚ international credit standing and sovereign ratings would be under threat.
Considering the events in Latin America, Fitch said the country’s fiscal worst could not have come at a worse time, leading investors to draw parallels with Brazil. The agency argued, however, that the
Philippines had none of the unstable debt dynamics found in Brazil and Turkey such as pervasive indexation, short maturities and high real interest rates.
"Having said that, foreign currency denominated debt accounts for 50 percent of government debt and half of this is owned to bond holders," Fitch pointed out, explaining that this left the Philippines potentially vulnerable to contagion and loss of market access.
Working in its favor, on the other hand, was the fact that the country’s demands on the international capital markets were still modest. The Philippines also has a comfortable external liquidity and it had no external financing gap in 2002-2003.
"On past occasions when the Philippines has been shut out of the international capital market, it has encountered little difficulty refinancing debt in the domestic market," Fitch said.