Japanese agency says higher rating outlook for RP possible

The Japan Credit Rating Agency Ltd. (JCRA) may raise its rating outlook for the Philippines if the political turmoil surrounding President Arroyo comes to an end and the government’s export recovery program becomes clearer.

"If the political crisis comes to an end and the export recovery becomes clearer, leading to a more stable economic performance, it will become necessary for JCRA to consider revising the country’s rating outlook again," JCRA said in its quarterly sovereign review.

It noted that "now it appears that an end may be brought to the political crisis that had troubled the Arroyo administration over the last three months since June."

The JCRA downgraded its BBB rating to BBB- for the Philippines’ foreign and domestic currency debt papers last July 15, 2005.

JCR has changed its rating outlook for the Philippines from stable to negative in view of concern over some adverse impact the rapid deterioration of the situation may have on the reforms and the economy

In giving out such rating, the firm believed that the negative factors outweighed the positive ones. 

Among the positive notes are: good policy management; comparatively stable economic performance; and relatively sound foreign liquidity position.

The negative factors, on the other hand, include:  political instability; weak fiscal position; poverty problems; intensifying competition from China in foreign direct investment; and industrial structure heavily dependent on imported capital and intermediate goods.

Based on its updated review for the period June to August 2005, there were more positive factors than the negative ones.

JCR cited the increase in OFW remittances; fiscal deficit improvement; exports recovery; SC ruling on expanded value-added tax (EVAT) last Sept. 1; and Congress’ rejection of the impeachment charges against President Arroyo.

There were only two negative factors that were noted by JCR in its recent review.  These were: inflation rate remained unabated at 7.2 percent in August (8.5 percent in May, 7.6 percent in June and 7.1 percent in July); and streets protest, demanding for President’s resignation.

The rating agency, however, noted that if the EVAT will not be implemented this year, the National Government will be forced to revise its economic growth forecast downward.

The national budget for 2006 is proposed to total P1.09 trillion, up by 13.5 percent from P963.2 billion this year.  Macroeconomic assumptions supporting the budget plan included a 6.1 percent economic growth rate, a 7.5 percent inflation rate and 11 percent import growth.

The EVAT is supposed to generate an additional P82.6 billion to P105 billion revenues for 2006 if the EVAT rate can be raised from the current 10 percent to 12 percent.

However, it noted that the government may decide to defer the application of the 12 percent EVAT rate on oil and power from Jan.1 2006 to June 1, 2006 to curb the continued rise in consumer prices. "How these factors will affect the tax revenues remains to be seen," it said.