S&P downgrades RP’s outlook to ‘negative’

Global ratings agency Standard and Poor’s (S&P) downgraded yesterday its outlook for the Philippines’ long-term sovereign credit rating from "stable" to "negative," warning that the government’s eroding fiscal position could put pressure on the peso.

"The change in outlook reflects diminishing prospects for the fiscal consolidation that is necessary to stabilize and reduce the government’s high debt burden and sustain investor confidence," S&P sovereign analyst Joydeep Mukherji said in a statement.

Presidential Spokesman Rigoberto Tiglao responded by saying that President Arroyo regretted the outlook revision which was almost entirely based on fiscal problems that emerged in the first half of the year.

Tiglao said it was unfortunate the revision was announced just when the Philippines’ revenues had started to comply with the government’s target.

For his part, National Treasurer Sergio Edeza said that S&P’s move to downgrade its rating outlook may prompt the government to delay foreign borrowings for the rest of this year.

"We have to assess the market, how much widening (there will be) on account of the change in outlook. It may be a trigger to prompt us to postpone foreign offerings this year because the market has destabilized," Edeza said.

The global ratings agency affirmed its "BB+" long-term and "B" short-term foreign currency sovereign ratings on the Philippines as well as its "BBB+" long-term and A-2 short term local currency sovereign credit ratings.

The S&P revision followed a report by the government last week that its budget deficit for the first nine months of the year reached P166.47 billion, exceeding official projections by 57 percent.

According to Mukherji, the change in outlook reflected the diminishing chances of fiscal consolidation which he said was critical in managing the national debt.

At 80 percent of the GDP, Mukherji said this level already exceeded the level in most similarly rated sovereigns.

"Interim results during the current fiscal year indicate poor revenue collection, especially from the Bureau of Internal Revenue," Mukherji noted. "The fiscal deficit may approach 4.5 percent of GDP in 2002."

"The Philippines’ high fiscal debt has reduced its budgetary flexibility, with interest payments consuming about 30 percent of central government revenues this year," Mukherji added.

He said that the Arroyo administration’s structural reforms and efforts to bring more coherence to economic management could be jeopardized by its inability to meet its long-term fiscal objectives.

S&P also criticized the government’s failure to adhere to a credible fiscal strategy which Mukherji said "could increase pressure on the Philippine peso."

With more than half of its debt denominated in foreign currencies, Mukherji said a sharp depreciation of the peso would raise debt servicing costs, worsen fiscal rigidity and damage the country’s actual credit rating.

"Conversely, tighter and more consistent fiscal management along with timely implementation of reforms in the energy and banking sectors could improve investor confidence," Mukherji said.

BSP Governor Rafael Buenaventura said he was "relieved" that the current ratings were affirmed but expressed disappointment over the outlook downgrade which effectively indicates how the ratings would go in subsequent evaluations of the credit rating agency.

Buenaventura admitted that the national deficit could go up to 4.5 percent of GDP, hinting for the first time that the Arroyo administration might have to admit defeat and move back its schedule for a balanced budget from 2006 to 2008.

"The question now is how the 2003 targets would look and whether the government can control its expenditures while sustaining the growth in revenues," Buenaventura said adding that "I hope we can achieve the medium term target of balancing the budget by 2006 to 2008."

On the other hand, Finance Secretary Jose Isidro Camacho downplayed S&P’s decision to downgrade its outlook on the Philippines as a "knee-jerk reaction" to the deficit which amounted to P166 billion at the end of the third quarter this year.

"They underappreciated the fact that there was an improvement in the BIR collection during the second half and the fact that the economy is healthy outside the deficit," Camacho said.

Camacho admitted, however, that S&P’s move could trigger a spate of downgrades among the other rating agencies, saying that the Philippines was not an isolated case.

He claimed that other countries like Japan have also suffered similar downgrades.

"Since 1997, rating agencies have become gun-shy," Camacho said. "They’ve been slow to upgrade but quick to downgrade," he added.

Camacho said he was not worried that the downgrade would have any significant impact on the government’s subsequent borrowing, saying that there were alternatives that could be considered, including the possibility of borrowing from Japan and using its credit enhancement.