Fitch affirms credit ratings, 'stable' outlook for RP

MANILA, Philippines – London-based Fitch Ratings affirmed yesterday all of its credit ratings as well as its “stable” outlook for the Philippines despite expectations that the country’s deficit would soar to P271 billion this year.

Fitch said the economy is likely to slow down dramatically to 0.1 percent this year because of the country’s plummeting exports and the expected 6.8-percent decline in remittances.

Despite these gloomy numbers, Fitch Ratings said it is maintaining its long-term foreign and local currency ‘issuer default’ ratings (IDRs) at ‘BB’ and ‘BB+’, respectively. The agency also affirmed the short-term IDR at ‘B’ and the ‘country ceiling’ at ‘BB+’.

Fitch said the Philippines has not been directly exposed to some of the most serious aspects of the international financial crisis, but it is not impervious to the deterioration in the global economy.

In response to the effects of the global recession on the economy, the government has initiated a P330-billion economic resiliency plan focused primarily on infrastructure investment and social spending.

Fitch said the main budget implications of the plan was the P160 billion in additional spending and P40-billion in tax cuts, with a 2009 deficit target of P229 billion.

But Fitch said the fiscal deficit is more likely to reach P271 billion, equivalent to 3.5 percent of the projected gross domestic product (GDP).

“The fall in tax revenue in the first quarter will be very difficult to make up in the remainder of the year as the economy slows,” said James McCormack, Head of Asia Sovereigns at Fitch.

McCormack said government revenue (excluding privatization) is down by four percent in the first quarter, marking the weakest first-quarter revenue outturn in 22 years.

“Fitch assumes there will be further fiscal policy adjustments as the year progresses, and the agency expects spending to be slightly below the current target by year-end,” McCormack said.

Nevertheless, McCormack said the forecast increase in the Philippine fiscal deficit in 2009 was in line with those of other ‘BB’-rated sovereigns, as is the deficit level itself.

In terms of government debt, however, Fitch said the Philippines compared unfavourably with its rating peers.

In 2008, McCormack said the National Government debt to GDP ratio was 56.3 percent, with the consolidated general government debt estimated at about 46 percent of GDP.

The ‘BB’ consolidated general government debt median was 30.6 percent.

“The debt-to-revenue ratio is even more telling, with the Philippines at 360 percent versus the peer median of 141 percent,” McCormack said. “Fitch has long considered the Philippines’ low government revenue base - among the lowest of all rated sovereigns - to be a fundamental rating weakness,” he added.

With a much weaker economy and elections due next year, McCormack said Fitch did not believe revenue enhancement would be a short-term policy priority.

“Consequently, if the expected increases in spending are not reversed once the economy begins to recover, or revenue collection is not stepped up considerably, there is a risk that Philippine government debt ratios may deviate further from the ‘BB’ medians, with possible negative rating implications,” Fitch said in the report.

McCormack said remittances had provided critical support to economic growth by supplementing household income and inflows were even more than enough to offset the $12.6-billion trade deficit, resulting in a $4.2-billion current account surplus.