S&P retains stable outlook for RP

MANILA, Philippines – Standard & Poor’s Ratings Services has retained its stable outlook on the Philippines, indicating that the ratings are unlikely to change over the short term.

The international credit agency also affirmed all of its credit ratings, citing the country’s external strength and the stability of its banks.

The credit rating agency said this outlook could actually be revised to positive if the government showed renewed focus and commitment to fiscal consolidation and revenue improvement.

“The ratings and stable outlook balance the external strength and relatively low vulnerability of the banking sector against the Philippines’ long-standing fiscal weaknesses, which have been accentuated by the effects of the global economic downturn,” Finance Secretary Margarito Teves said.

S&P said the ratings and stable outlook reflected the balance between the country’s external strength and relatively low vulnerability of its banking sector against its long-standing fiscal weaknesses.

S&P said these weaknesses were accentuated by the effects of the global economic downturn but the credit rating agency still decided to retain its current ratings and its outlook.

S&P said it was keeping its ‘BB-’ long-term and ‘B’ short-term foreign-currency sovereign credit rating on the Philippines. At the same time, it also affirmed the ‘BB+’ long-term and ‘B’ short-term local-currency sovereign credit ratings.

“The ratings derive much support from the apparent resilience of the sovereign’s external accounts,” S&P said in its report, adding that this strength showed improving liquidity position that continued to lower external liquidity risk even against the backdrop of an extremely challenging external environment.

“We welcome the affirmation of S&P of the Philippines sovereign credit ratings and its stable outlook on these ratings. We believe that this serves as a vote of confidence in the resiliency of domestic economy,“ Teves said.

The agency said resilient remittance inflows, which rose 2.6 percent in the first four months of 2009, combined with growing surpluses in service exports and prudent exchange-rate management, ensure a safe level of external reserves.

“And they have managed to do so in the face of drastic recent contractions in foreign direct investment and portfolio inflows,” said Standard & Poor’s credit analyst Takahira Ogawa.

Ogawa said the Philippines was, therefore, exposed to only moderate short-term liquidity risk compared with its peers in the rating category.

“We project its gross external financing requirements at 78 percent of usable reserves plus current account receipts,” Ogawa said. “We also expect its usable reserves to cover short-term debt with residual maturity.”

S&P said the level of the contingent liabilities of the banking system was also low and the likelihood was low that these liabilities would be realized. The agency said this was because of the absence of features that caused bank collapses and necessitated government bailouts in numerous other sovereign countries.

S&P said system-wide asset quality and capitalization might deteriorate slightly from 2008 levels of 4.2 percent nonperforming loans and a capital adequacy ratio of 14.6.

However, the agency said this potential worsening is likely to be capped by the absence of rapid credit growth and comfortable liquidity.

“These factors are balanced against ongoing risks regarding the inadequacy of the revenue base and slow progress in addressing this, as well as questions over collection efficiency and policy response in the current economic downturn,” S&P said.

Although to a large extent the sharp fall in fiscal revenues this year could be explained by cyclical factors, S&P said much of it was predictable. Offsetting measures on the revenue side that could have moderated the fiscal slippage were not forthcoming, it added.

According to the credit rating agency, the elections in May 2010 could create moderate volatility, and pose a distraction to policy making and implementation.

“But in our opinion, there is only a limited risk to policy continuity,” S&P said. “Nevertheless, the resulting delay in passing and implementing fiscal reform measures currently in the legislature could reignite concerns over the medium-term fiscal trajectory.”