S&P says RP rating could improve

Standard & Poor’s said the country’s rating will remain below investment grade without substantial improvement in fiscal profile and external liquidity.

In a report prepared by S&P analyst Takahira Ogawa and Joydeep Mukherji, the agency said the country’s stable outlook was based on expectation that the government will slowly stabilize the erosion of public finances witnessed in recent years.

Ogawa is currently in the Philippines as part of S&P’s ratings review and the agency is expected to come out with its new report ahead of the meeting of the International Monetary Fund (IMF) this month in Dubai.

According to Ogawa, the fiscal deficit is likely to crest at 5.4 percent of gross domestic product (GDP) in 2003 and to moderate over the medium term through greater efforts at raising tax revenue.

Ogawa said the privatization in the energy sector combined with the reduction in banking-sector non performing assets and renewed export growth could boost the country’s trend rate of economic growth, consolidating its credit standing.

"Conversely, failure to adhere to a credible fiscal strategy could again place pressure on the currency," he said. "With more than one half the government’s debt denominated in foreign currencies, a sharp depreciation of the peso would raise debt-servicing costs, worsen fiscal rigidity, and potentially hurt the country’s credit rating."

Ogawa explained that S&P’s "stable" outlook rating was supported by adequate external liquidity, with total debt service (including short-term debt) as a share of current account receipts projected at 38 percent while the total external debt is projected at 131 percent of current account receipts this year.

However, Ogawa said the rating was constrained by high fiscal debt and fiscal inflexibility. He pointed out that government debt was approaching 90 percent of GDP this year, compared with the median level of 51 percent for similarly rated sovereigns.

"Interest payments are likely to consume about 37 percent of central government revenue, up substantially from 22 percent in 1999," Ogawa said.