The London-based ratings agency said yesterday that the newly-inaugurated President Gloria Arroyo now has the opportunity to capitalize on her fresh mandate after winning the May elections.
However, Fitch said this would take potentially painful steps, including committing to raise taxes and finding a lasting solution to the financial problems at Napocor.
"Failure to exploit the improved political backdrop by making headway on fiscal policy tightening could see the Philippines’ rating strengths start to wither again, following the downgrade in 2003," said Brian Coulton, senior director of Fitch’s Sovereign Group.
In a special report released yesterday, Fitch said that the national budget deficit appeared on track this year but the long-term trajectory told a different story.
"The somewhat steadier near-term fiscal picture belies an underlying trend deterioration in fiscal health," Coulton said. He explained that this was reflected in five consecutive years of deficits of four percent of GDP or more, a sharp fall in tax revenues since the late 1990s, a rise in national government debt to 78 percent of GDP at end-2003 from 58 percent at end-1999 and an increase in the burden of debt interest payments.
With the decision to absorb P500 billion of Napocor’s debts, Coulton said the national government debt would rise to 90 percent of GDP. "This would be the highest of any sovereign in the ‘BB’ category," he said.
"Additional interest payments would add one percent of GDP to the deficit from 2005, pressuring national government fiscal targets and further underlining the need for tax increases," Coulton added.
Debt payments, Coulton pointed out, already absorbed 36 percent of total government revenues in 2003, a ratio that is already high compared to other sub-investment grade sovereigns and set to rise further.
With half of its debt represented by dollar-denominated external debt, Coulton said the government’s balance sheet is also exposed to exchange rate volatility.
"Moreover, national government finances conceal major fiscal problems in the state enterprise sector - specifically at Napocor, where losses have escalated sharply and were much larger than expected in 2003," he said.
Coulton said the Arroyo administration had a medium to long-term plan to address these fiscal concerns that entailed balancing the budget by 2009 largely by reducing the ratio of government spending to GDP.
"However, in light of diminishing flexibility on expenditure·there are doubts about whether such expenditure retrenchment is credible," Couton said. "It will be important to see a strong commitment by the Arroyo government to tax increases."
Coulton said Napocor’s "urgent privatization" is critical because its financial problems would have dire implications on the Philippines’ sovereign creditworthiness.
According to Coulton, Arroyo’s confirmation should bring to an end the prolonged period of political uncertainty that has been unnerving investor sentiment for several months.