RP credit rating stays ‘junk’

Published by rudy Date posted on July 4, 2009

STANDARD and Poor’s (S&P) on Friday said it is keeping its current credit score of below-investment grade or junk on the Philippines, adding that this rating would likely persist in the next six months to a year.

A below-investment grade or junk rating means that a borrower – in this case, the Philippine government – would have to bear higher interest rates whenever it taps the bond market for its financing needs.

In a statement, S&P said it affirmed the Philippines’ ‘BB-‘ long-term and ‘B’ short-term foreign-currency sovereign credit rating.

The rating company also affirmed the ‘BB+’ long-term and ‘B’ short-term local-currency credit score on the country.

S&P bestowed a stable outlook on these ratings.

The rating firm rates borrowers on a scale from AAA to D. Intermediate ratings are offered at each level between AA and CCC (for example, BBB+, BBB and BBB-). An intermediate rating that hovers on BB indicates a borrower is more prone to changes in the economy.

The outlook “balance[s] 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,” S&P 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,” Takahira Ogawa, S&P credit analyst, said.

The credit-ratings firm noted that the country was exposed to only moderate short-term risk compared with its peers in the same rating category.

“We project [the Philippiens’] gross external financing requirements at 78 percent of usable reserves plus current account receipts. We also expect its usable reserves to cover short-term debt with residual maturity 3.2 times,” Ogawa said.

The ratings drew support from country’s resilient external accounts, whereby an improving liquidity position continues to lower external liquidity risk even against the backdrop of an extremely challenging external environment.

S&P said the rating is also supported by the low level, and low likelihood of realization of, contingent liabilities posed by the domestic banking system, given the absence of features that caused collapses and necessitated government bailouts in numerous other countries.

System-wide asset quality and capitalization may deteriorate slightly from 2008 levels of 4.2 percent non-performing loans and a capital adequacy ratio of 14.6, the rating firm said.

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

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

S&P, however, noted that the May 2010 national elections may 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. Nevertheless, the resulting delay in passing and implementing fiscal reform measures currently in the legislature could re-ignite concerns over the medium-term fiscal trajectory,” the rating firm said.

It said the outlook could be revised to positive if the government showed evidence of a renewed focus and commitment to fiscal consolidation and improvement in revenue collections.

“By contrast, the outlook would change to negative if indications emerge that the deterioration currently experienced in revenue performance and fiscal balance outcomes is not a transitory phenomenon, either because of weakening commitment to fiscal prudence, or due to policy paralysis in a new administration,” Ogawa warned.

Finance Secretary Margarito Teves said the government welcomes S&P’s latest credit action.

“We believe that this serves as a vote of confidence in the resiliency of the domestic economy having withstood the worst impact of the global crisis,” he said.

“We will vigorously pursue our action plans at the [Bureaus of Internal Revenue and of Customs] to expand taxpayers’ data base in improving collection efficiency. We are hopeful that Congress will support our proposed revenue enhancement measures, which should help us in improving our credit outlook to positive. This will also allow us to raise sustainable revenues that are needed to support continued economic growth,” he added.

The Arroyo administration’s budget deficit ballooned by 556 percent in the first five months this year, as expenditures to prop up the economy outpaced tax collections.

Economic managers earlier cut the country’s growth target to between 0.8 percent and 1.8 percent after the sharp slowdown in the first-quarter to 0.4 percent.

They also raised the budget deficit ceiling to P250 billion, or 3.2 percent of gross domestic product (GDP), from the earlier P199 billion, or 2.5 percent of GDP.

An indicator of economic performance, GDP measures the value of final goods and services produced in a country, while the deficit-to-GDP ratio indicates how long a government can sustain revenue shortfalls.

To plug its deficit, the Philippine government has lined up a number of options to raise funds, including a plan to borrow in the Japanese debt market through the issuance of so-called Samurai bonds or IOUs, and the possible issuance of so-called ROPs or Republic of the Philippines sovereign bonds. –Lailany P. Gomez, Reporter, Manila Times

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