With its strong international reserves, better fiscal position and financial flexibility, Citigroup said the Philippines is actually better off than Indonesia despite unfavorable comparisons that have been made between the two countries.
Moody’s Ratings Services earlier said that the Philippines was in a more vulnerable position than Indonesia as both countries faced increases in oil and food prices.
Citi said Moody’s assessment might have been “flawed” but it could also mean that it would delay the country’s upgrade prospects whose B1 rating has been on positive outlook since January this year.
Citi analyst Johanna Chua said the Philippines is still rated a notch below Indonesia but judging by the spreads on the country’s external debt, the market appeared to have ignored Moody’s assessment.
Chua said while the Philippines’ debt and fiscal ratios look worse than Indonesia, this was a pre-existing condition even before the dramatic rise in food and oil prices.
“But we think the impact on fiscal and financing position of the Philippines, at the margin, is less than Indonesia,” Chua said.
For starters, Chua said the Philippine government did not subsidize fuel and so far, only had moderate subsidy on food.
Chua estimated the cost of food subsidies to be around 0.4 to 0.8 percent of gross domestic product (GDP), funded through the NFA’s credit lines from local commercial banks and covered by government guarantees.
“The impact on the National Government budget and financing program is limited up front,” Chua said. “While this impacts the consolidated public sector balance, the burden and financing look manageable.”
In contrast, Chua said Indonesia is expected to spend up to 19 percent of its total spending in 2008 on energy subsidies alone, equivalent to about five percent of its GDP.
“The continued rise in fuel prices has forced Indonesia to readjust the 2008 budget twice to accommodate a 28-percent increase in the budget deficit from the original program,” Chua pointed out.
At present, Chua said the country’s rice subsidies looked small enough to be accommodated through existing local bank credit lines. Even if the government were to incur fiscal slippages, she said it also had a surplus cash position from 2007.
The surplus cash came from the sale of government assets which last year generated an estimated P90.6 billion in one-time gains. Although these proceeds made analysts edgy about masking the failure to meet the revenue targets, they said this was still cash already in the box.
“We think the Philippines has more to expand local borrowing to meet unforeseen financing shortfalls,” Chua said.
Indonesia, on the other hand, had little recourse to privatization as well as domestic bank accounts. Moreover, Chua said Indonesia was programmed to be net repaying official loans of up to $1.4 billion this year.
More importantly, however, Chua said the Philippines’ external position was stronger than Indonesia, with a foreign exchange reserve position of over $36 billion.
Although Indonesia was a net exporter of oil, gas and food, Chua said the trade imbalance in the Philippines was being offset by strong remittances from overseas workers.