Fitch Ratings says con-ass ‘ potentially disruptive’

Fitch Ratings called the proposed constitutional change "potentially disruptive" as it projected a slowdown in growth in 2007 with political and security concerns upstaging economic issues.

Fitch said in its "Asia Sovereign 2007 Outlook" that political and security issues will preoccupy the Philippines and other Asian countries in 2007.

The midterm elections in May and the debates on Charter change will continue to dominate Philippine politics next year, according to Fitch.

Fitch said the Cha-cha issue was "disruptive" because it erupted at a time of slower global economic growth.

Fitch said this slowdown was expected to cause current account positions across much of emerging Asia to deteriorate, contributing to smaller accumulations of official foreign exchange reserves.

"For the region, Fitch forecasts a reserve build of $300 billion next year, which would be slightly lower than 2006, but still enough to improve net debt positions and support sovereign creditworthiness," said James McCormack, head of Asia Sovereigns.

In the report, Fitch said regional credit considerations would include the effects of a slowdown in US gross domestic product growth, an anticipated reduction in the rate at which official foreign exchange reserves are accumulated, and potentially heightened political risks in several countries.

"Not surprisingly, the most open economies appear to be the most vulnerable to a shift in external demand," said McCormack.

With less favorable growth prospects for Emerging Asia, McCormack said capital inflows were forecast to decline in 2007.

Fitch said that a sharper-than-expected broad decline of the US dollar would renew upward pressure on Asian exchange rates, and central banks could again resort to intervention, adding more to official foreign exchange reserve holdings.

Fitch has already expressed apprehension over political uncertainties in the country and projected the real GDP to grow by only 4.5 percent in 2006, much lower than the original projection of at least 5.7 percent.

Fitch said in its credit update report earlier this year that it was retaining its ratings at ‘BB’ and ‘BB+’, respectively. At the same time, the agency has also affirmed the Philippines’ Short-term Issuer Default Rating at ‘B’ and the Country Ceiling at ‘BB’.

With changes to the VAT now fully implemented, the agency said it expected the national government deficit to fall to 2.1 percent of GDP this year and the primary surplus to reach 3.4 percent of GDP.

Fitch noted, however, that while short-term fiscal prospects have improved, medium-term challenges remain.

"Even with the VAT in place, government revenue relative to GDP is the second-lowest of all rated sovereigns," McCormack said. "It is as yet unclear how or whether it will increase to meet mounting spending pressures, which we believe to be forthcoming."