Bangkok--26 Jul--Standard & Poor's
Standard & Poor's Ratings Services said today it affirmed its 'BB-' senior unsecured rating on the Republic of Philippines' (foreign currency BB-/Stable/B, local currency BB+/Stable/B) bonds due 2016 and 2031. The Philippine government is reopening the republic's 8% bond due in January 2016, and its 7.75% bond due in January 2031, and increasing the issue size by a total US$750 million.
Standard & Poor's revised its outlook on the sovereign ratings for the Philippines to stable from negative in February 2006. The stable outlook reflects improved expectations concerning the prospects of policy continuity and adherence to fiscal consolidation, following the full implementation of the expanded VAT law, and an ameliorating political backdrop.
"These developments point to an increased likelihood that overall deficit reduction and fiscal rationalization will continue and deepen, even as risks such as a resurgent political instability, implementation, and administrative weaknesses could persist," said Standard & Poor's credit analyst Agost Benard.
The principal factor constraining the ratings on the Philippines is its high public and external debt levels and the accompanying impairment of fiscal flexibility. The net general government debt is estimated at about 70% of GDP, compared with the median 48.5% for similarly rated sovereigns. This debt level imposes significant constraints on discretionary spending, not least owing to the large proportion of expensive commercial borrowings. Thus, while decreasing from a peak of 38.4% in 2004, interest payments as a share of government revenue are still among the highest at over 30%.
The creditworthiness of the Philippines is also constrained by a narrow tax base, which is a main contributing factor to its weak public finances. Notwithstanding recent improvements, tax revenues are a low 13.5% of GDP, compared with 17% in 1997.
The Philippines' fiscal outcomes for the first half of 2006 were better than expected, bolstered by improved revenue collection and a decision not to lower VAT on oil, but to reduce the import duty on oil instead. This year's deficit target of 2.1% of GDP should be easily met and even outperformed, given that expenditure is constrained to 2005's level owing to Congress's failure to pass the 2006 budget. Even as revenues gradually rise, the fiscal outlook could be vulnerable due to politicking in the lead-up to the 2007 congressional elections, and the need to substantially increase spending--in particular capital expenditure--to boost future growth prospects.
The outlook and ratings on the Philippines could benefit if fiscal and public sector reforms, including privatization of the electricity sector, become sufficiently entrenched to effect a material decline in government debt. That would ease external vulnerability, given that almost one-half its debt is denominated in foreign currency. If, however, the process lapses or becomes derailed by political imperatives, the outlook could again come under downward pressure.
Complete ratings information is available to subscribers of RatingsDirect, Standard & Poor's Web-based credit analysis system, at www.ratingsdirect.com . All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com ; under Credit Ratings in the left navigation bar, select Find a Rating, then Credit Ratings Search.
Media Contact:
David Wargin, New York (1) 212-438-1579
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Analyst Contacts:
Agost Benard, Singapore (65) 6239-6347
Ping Chew, Singapore (65) 6239-6345
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