Fitch downgraded yesterday the country’s sovereign ratings outlook, citing "further evidence of falling tax revenues, which have undermined the government’s fiscal credibility and raised concerns about rising public indebtedness."
US-based Standard and Poor’s took the same action in October.
Both agencies now rate the Philippines’ long-term foreign currency rating at BB-plus, or just under investment grade, and the long-term local currency rating at BBB-minus.
The country was rated Ba1 by Moody’s Investor Service with a stable outlook.
Analysts said the government’s inability to keep the deficit under control – mainly because of inefficient tax collection and corruption–has rattled foreign investors, pushed up premiums on sovereign bonds and put pressure on the beleaguered peso.
"Fitch has succumbed to the inevitable and followed S&P’s move last month," Charlie Lay, an economist at 4Cast Ltd. said yesterday. "An actual downgrade to BB is almost a certainty in the next six months," he added.
The government last week raised its budget deficit ceiling for this year to 5.6 percent of gross domestic product (GDP) from four percent, amid weak revenue inflows.
Fitch analyst Paul Rawkins said the agency’s ratings were "forward looking" and the weakening public finances reflected its decision to downgrade the country’s currency rating to BBB-minus in March this year.
"The agency [now] says that a stable outlook appears increasingly inappropriate in the context of the seemingly relentless decline in public revenues, particularly when judged against the background of modest economic recovery and a benign macro-economic environment," Rawkins said.
Bangko Sentral ng Pilipinas (BSP) Governor Rafael B. Buenaventura said the downgrade was not surprising. "It’s a wake-up call," he said.
For his part, Finance Secretary Jose Isidro Camacho said the government will continue to focus on fiscal discipline and associated reforms.
"We all know this is a tough nut to crack but our persistence and determination will pay off in the medium term as we work toward a more sustainable growth in the country’s tax collection base," Camacho said.
"But we want to assure Fitch that the government continues to prioritize fiscal discipline," he added.
According to Rawkins, the Philippines displayed "few of the unstable debt characteristics so familiar to lower-rated sovereigns like Brazil and Turkey, but it (Philippines) was more vulnerable to shifts in investor confidence."
However, Rawkins said that unlike the two troubled countries, the Philippines’ foreign currency-denominated debt made up a much higher proportion of public debt, half of which were owed to bondholders.
Rawkins also noted that public revenues have fallen from a peak of 19.1 percent of GDP in 1997 to a projected 13.9 percent in 2002. This, he said, reflected institutional shortcomings at the Bureau of Internal Revenue (BIR).
The situation was made worse by the fluctuations in public expenditures which was dominated by non-discretionary line items that constrain higher outlays on essential social and developmental needs.
Rawkins explained that Fitch’s decision to downgrade reflected the "knock-on" effect to next year, since the Arroyo administration had revised its 2003 deficit to 4.7 percent of GDP compared to its original target of 3.3 to 3.7 percent.
"Fitch is not surprised by this revision: Short of a near Herculean effort on the part of the BIR, there was little chance of the government realizing a revenue target of 14.9 percent of GDP next year," Rawkins said.
Moreover, Rawkins said Fitch still had doubts about the government’s ability to contain expenditure to only 18.3 percent of GDP in 2003.
"Yet in the light of its experience in 2002, the government can hardly afford to set unrealistic targets for 2003," Rawkins said.