Standard & Poor's cuts RP growth forecast to 1.3%

MANILA, Philippines - Standard & Poor's (S&P) has lowered its 2009 growth forecast for the Philippines from 1.7 percent to 1.3 percent, saying that the official growth forecast of 3.1 percent to 4.1 percent is unlikely to be met.

S&P said a ratings downgrade could also happen if stalling reforms or weakening revenues lead to higher fiscal deficits, or if budget goals could only be met through spending cuts at the expense of future growth prospects.

Under S&P’s ratings system, the Philippines was rated as BB-negative for foreign currency debt and BB-positive for its local currency debt. The agency’s last rating action was in February 2006 when the outlook was upgraded from “negative” to “stable”.

S&P senior analyst Agost Benard said the country’s main weaknesses have been the same throughout the last few years, mainly its high public-sector debt stemming from a narrow tax base and inefficient public enterprises.

Benard said the Philippines also had a heavy foreign currency debt exposure and the consequent vulnerability to adverse exchange rate changes although he noted that these pressures have been easing.

Benard also said the government was burdened with a high contingent liability level from government-guaranteed debt and public private partnership projects – always a constant threat to its total debt burden.

“The Philippine economy appears to be slowing to a greater extent than expected, growing just 0.4 percent year-on-year in the first quarter,” Benard said.

According to Benard, this suggested that domestic demand is providing less of a buffer against the collapse of external demand than most had expected – a development that could prove alarming since government economic planners have been counting on domestic demand to continue supporting growth.

But Benard pointed out that domestic demand fell 0.2 percent year-on-year, as personal consumption (which accounts for 70 percent of GDP) grew by just 0.8 percent and investment, and public spending remained weak.

Benard said the official growth forecast is unlikely to be met and the disappointing economic performance in the first quarter led to the agency’s decision to lower its own growth forecast for the country this year.

“In the wake of the disappointing growth numbers, the BSP promptly cut policy rates by 25 basis points to forestall a recession,” Benard noted. “Hence, any chance of a shift to a neutral monetary position is small, at least until the end of the year, especially given still-moderate credit growth and falling inflation.”

Benard admitted that the weakness in consumption was surprising given that remittance inflows are still growing-contrary to most expectations.

During the first quarter, remittances from overseas Filipino contract workers (OFWs) rose 2.7 percent year-on-year, while the number of workers deployed offshore rose 27.3 percent. As remittances normally act as a key support for sustaining local consumption, he said the low domestic consumption figures against still-growing remittances imply that more of the inflows are being saved.

“Remittances, however, continue to underpin external liquidity, as does the large import content of exports, where a 34.3 percent fall in import in the first quarter, almost wholly offset the 36.8 percent decline in exports,” Benard said.

Benard said the country’s overall balance of payment surplus showed the strength in the country’s external liquidity and this remained as a key credit supporting factor.

But Benard pointed out that the weak economy is causing headaches on the fiscal front, where a significant shortfall in government revenues is casting doubts on the government’s ability to meet its 2009 deficit target of 2.5 percent of GDP.

At the moment, Benard said S&P’s stable outlook reflected the balance between the country’s increasingly solid external liquidity and the improvements in general government and public-sector financial performance against continued risks to revenue and deficit targets in light of collection inefficiencies and a narrow tax base.