While Moody’s decided to maintain its negative outlook on the Philippines despite new tax reform measures, Standard & Poor’s revised its outlook on Philippine debt from "negative" to "stable" as it acknowledged the Arroyo administration’s moves to raise taxes and boost the government’s ability to pay off its debts.
"We take the mixed outlook on the positive side. We are off to a good start and all we have to do is sustain our focus and keep on track with our economic blueprint," Press Secretary Ignacio Bunye said in a statement.
The Palace expressed appreciation for S&P’s acknowledgment of the significant headway" the government has made to achieve fiscal consolidation.
In a statement late Thursday, S&P said it was affirming the country’s "BB-/B" foreign currency and "BB+/B" local currency ratings. A stable outlook meant that the country was no longer at risk of downgrade, at least for the time being.
S&P’s announcement pushed the peso up to a new three-year record, hitting a high of 51.455 to $1 in early trade, up more than half a percentage point from Thursday’s close and its strongest against the dollar since August 2002.
"It is important to note that the outside world is focused on the Philippine economy and not on the noise of Philippine politics. This is aligned with our prime focus on investments and jobs," Bunye said.
Budget Secretary Romulo Neri said it was important to note that the Philippines remained credible in the eyes of credit institutions.
S&P said its assessment of Philippine foreign debt, currently at three notches below investment grade "B+," could further improve if government revenues grew and fiscal reforms deepened.
"The stable outlook reflects revised expectations concerning the prospects of policy continuity and adherence to fiscal consolidation, which foreshadows improved chances for overall deficit reduction and stabilization of the country’s debt dynamics," S&P credit analyst Agost Benard said.
Bernard noted that the outlook revision was based on better-than-expected 2005 fiscal ledgers and the recent implementation of the EVAT.
He said that fiscal results show deficit of an estimated 2.7 percent of GDP and a primary surplus of 2.0 percent of GDP, the highest attained since 1997.
"There is scope for further improvement this year with the additional revenue from the VAT, while the consolidated public sector deficit should narrow from lower losses by state electricity company National Power Corp.," Bernard added.
Finance Secretary Margarito Teves said the S&P upgrade and general market sentiment reflect increased investor confidence in the Philippines.
Bangko Sentral ng Pilipinas Governor Amando Tetangco Jr. affirmed that S&P’s move was in line with market expectations that the Arroyo administration is finally getting a grip on its fiscal problems on the way to balancing the budget by 2008.
National Treasurer Oman Cruz also said the S&P merely reflected the sentiments of the market.
"I’m always delighted with market-like assessments of risk," Cruz said. "We have no control over what credit rating agencies are going to say but they can say one thing and the market will say another. I like what the market is saying right now."
Neri added that Moody’s at least did not downgrade the Philippines’ rating especially since the expanded value-added tax (EVAT) law had been implemented.
Moody’s said it would not upgrade its credit outlook on the Philippines until new tax reform measures yielded solid revenues.
It retained its negative rating for the Philippines, saying the government would have to do more to bring the country’s "exceptionally high public sector debt" down to a level consistent with its credit rating.
President Arroyo’s economic adviser, Albay Rep. Joey Salceda, said the government must drastically improve its revenue collection efficiency.
Salceda, chairman of the House committee on economic affairs, said the country needs "stronger and credible leadership" in collection agencies to put to rest "residual doubts" on the sustainability of the government’s fiscal momentum to get upgrades.
S&P itself admitted that the Philippines’ debt service ratio was still one of the highest among rated sovereigns at about 36 percent of revenues.
"The administration’s challenge is to turn the recent fiscal advances into a sustained and expanded trend," Bernard said. "This will require ongoing political commitment, effective implementation and administration of the VAT, and continued reduction of tax evasion."
Moody’s and S&P cut the Philippines’ outlook to negative in July after the Supreme Court stopped the Arroyo administration from expanding the coverage and increasing the rate of the EVAT.
After finally increasing the VAT from 10 percent to 12 this month, the Arroyo administration has been expecting credit rating agencies to upgrade the country’s rating to acknowledge the tax reform efforts.
Moody’s, however, said the Philippines would have to make more progress in its fiscal consolidation before "downward pressure is removed on its B1 ratings."
As expected, administration lawmakers expressed elation over the S&P’s decision to upgrade the assessment of the country’s foreign debt.
Representatives Jesli Lapus, chairman of the House committee on ways and means, and Federico Sandoval II, vice chairman of the committee on appropriations, said they do not expect all ratings agencies to immediately give a positive outlook on the country now since some of them may continue with a wait-and-see attitude on the implementation of the EVAT and how the new revenues will be allocated.
Lapus said they remain optimistic that Moody’s will eventually follow S&P in giving a positive assessment for the country.
After Moody’s and S&P’s, the London-based Fitch Ratings is the last of the three major credit rating agencies to announce its decision on whether to retain its outlook rating or to upgrade.
Fitch, however, is not scheduled to review its Philippine sovereign rating until April this year.
"The country will hopefully get the nod of all the other agencies in the next rating period," Sandoval said, adding that local and foreign businessmen are now upbeat with the local economy despite the continuing political noise. — With Des Ferriols, Paolo Romero, AFP