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Standard & Poor’s Ratings Services has lowered its long-term foreign currency sovereign credit rating on the Republic of the

  • Philippines to ‘BB’ from ‘BB+’ and affirmed its ‘B’ short-term foreign currency rating on the sovereign. At the same time, Standard & Poor’s lowered its long-term local currency rating on the Philippines to ‘BBB’ from ‘BBB+’ and its short term local currency rating to ‘A-3’ from ‘A-2’. The outlook on the long-term ratings is stable.

    The downgrade reflects the government’s growing debt burden and fiscal rigidity that increasingly portray the profile of a country at the ‘BB’ rating level. “The central government deficit is likely to remain high at about 5% of GDP by government’s definition this year, compared with 5.4% in 2002, due largely to weak tax collection,” says Takahira Ogawa, director at Standard & Poor’s Asia-Pacific Sovereign Ratings Group.

    “As a result, general government debt could reach 85 % of GDP this year, up from 76% in 1999. This is substantially higher than the median level of 50% for similarly rated sovereigns,” adds Ogawa. Servicing the growing debt burden is expected to consume about 38% of government revenues this year, considerably more than the 22% in 1999.

    The stable outlook is based on expectation that government will slowly stabilise the erosion of public finances seen over the past few years. The fiscal deficit is likely to crest at 5.4% of GDP in 2002 and to moderate over the medium term through greater efforts at raising tax revenues.

    Failure to improve fiscal management could further weaken confidence, potentially putting pressure on the currency. With more than a half of government debt denominated in foreign currencies, further depreciation of the peso would raise debt-servicing costs, and increase fiscal rigidity. Any worsening of fiscal rigidity, in combination with a continued increase in the general government debt burden, would affect the country’s credit rating.