Moody’s has been rumored to be mulling a two-notch downgrade for the Philippines in February unless the Arroyo administration delivers on its key tax reform measures.
Last week, the country’s economic officials engaged in a teleconference with Moody’s after the House ratified the proposed increase in the value added tax (VAT) rate.
BSP Governor Rafael Buenaventura said Moody’s had noted that the country’s strong external liquidity has allowed the government to meet its maturing dollar-denominated obligations. Although Moody’s and other credit rating agencies have expressed alarm over the fact that government continues to beef up its reserves through foreign borrowing, Buenaventura said the country was credited for not using these reserves to prop up the peso.
Even when the peso hit an all-time low in June when the exchange rate dropped to P56.45 to the dollar, the BSP was not overly propping up the peso through massive infusion of dollars from its reserves.
Buenaventura said he is hoping to avoid the two-notch downgrade although sources privy to ongoing talks with Moody’s revealed that the best the country could hope for is a one-notch downgrade accompanied by a "stable" outlook.
Moody’s gave its stern warning of a ratings downgrade last month, expressing alarm over the deteriorating sustainability of the government’s fiscal and debt positions due to "political difficulties" in Congress.
According to industry sources, this is the same concern that would push Moody’s to take drastic ratings action, including the possibility of a two-notch downgrade.
Moody’s review would affect the Philippines’ Ba2 foreign-currency rating for government bonds, the Ba2 long-term foreign-currency country ceiling for bonds, the Ba3 long-term foreign-currency ceiling for bank deposits, as well as the Ba2 local-currency rating of the government.
A top-level source, however, said that even if the measures would be passed, Moody’s would retain the Philippines on its downgrade watch. If only some of these measures are passed, the downgrade would be one-notch while the outlook would depend on the quality of the measures that would come out from Congress.
Failing to pass anything at all would deliver a two-month downgrade not only from Moody’s but possibly from Fitch and Standard & Poor’s. This, the source said, would immediately impact on investments since investors depend on credit ratings to determine their investment decisions.
Buenaventura admitted that investment funds such as the California Public Employees Retirement System (CalPERS) normally disqualify countries that have been downgraded.
Moody’s announced that it was reviewing the country’s long-term foreign- and local-currency ceilings because of what it referred to as the "continued deterioration" in the country’s fiscal and debt positions.
Moody’s last downgraded the Philippines in Jan. 2004 and even with the downgrade, its outlook remained "negative", an indication that yet another downgrade could be in the offing because its primary concerns were not being addressed by government policy.
"Attempts by the government to pass into legislation urgently needed revenue measures are proving to be politically difficult," Moody’s said, adding that these difficulties were apparent despite President Arroyo’s electoral victory last year and the ruling coalition’s majority position in Congress.
"The rating agency believes that a back-loaded fiscal reform program increases the country’s vulnerability to shocks more than a proactive program would," Moody’s said.