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Standard & Poor’s Ratings Services has affirmed its long-term foreign currency sovereign credit rating on the Republic of the Philippines at ‘BB’. At the same time, Standard & Poor’s lowered its long-term local currency rating to ‘BBB-‘ from ‘BBB’, and affirmed the ‘B’ short-term foreign currency and the short-term local currency rating of ‘A-3′. The outlook on the long-term ratings is stable.
The affirmation of the long-term foreign currency rating takes into account the country’s satisfactory external liquidity position, which is underpinned by the stable inflow of overseas remittances.
“The Philippines’ short-term liquidity risk is moderate and compares favourably with its peers,” says Standard & Poor’s credit analyst Agost Benard, associate director in the Sovereign & International Public Finance Ratings Group. The country’s reserves provide short-term debt coverage of about 270%, and the ratio of gross financing requirement (current account, short-term debt, and amortization) to reserves is projected at 54% this year.
“The downgrade in the local currency rating reflects the elevated risk of the large general government debt limiting fiscal flexibility, given the possible rise in interest rates, and the country’s shallow capital markets, which have a limited capacity to absorb more debt,” says Benard. “This also implies an increased risk of crowding out private sector investment, which has been struggling to regain momentum since the 1997 Asian financial crisis, and a consequent impairment of future growth prospects.”
The stable outlook reflects the expectation that the new administration will slowly reverse the erosion of public finances witnessed in recent years.
“Following her re-election, president Gloria Macapagal Arroyo is in a stronger position to move boldly on reforms in the fiscal and power sector areas,” adds Benard. “Nevertheless, our optimism is somewhat tempered by the knowledge that most of the measures required to turn around public finances will be politically difficult, and that legislative and implementation risks persist.”