Moody’s explains RP rating

Despite the fiscal progress made by the Arroyo administration, credit rating agencies said "objective indicators" still point to a much weaker relative fiscal position through 2006 and most likely until 2007.

Moody’s Investor Service said in its special report released late last week that compared to other countries with similar credit rating as the Philippines, key ratios pointed to weaker fiscal position.

According to Moody’s the proportion of the country’s debt relative to government revenues remained close to 500 percent while the ratio of revenues to gross domestic product was above 400 percent.

"This is a high level even for a B-rated government," Moody’s said. "This indicates the large adjustment needed in boosting revenues and reducing debt to avoid the possibility of future debt servicing difficulties."

According to Moody’s, the median revenue to GDP ratio for B-rated countries was forecast to reach 24.2 percent. In contrast, the country’s public sector revenues ratio to GDP was forecast to reach 23 percent and the National Government (NG) revenues ratio to GDP was forecast at 16.9 percent.

Public sector debt to GDP ratio, on the other hand, was forecast by Moody’s to drop from 91.3 percent in 2005 to 85 percent but this was still way above the B median of 55.6 percent.

Government debt to revenue ratio was projected to go down to 370 percent for the entire public ratio compared to the B median general government ratio of 264.3 percent.

The most telling ratio was the proportion of interest payments made by the NG to its total revenues which was forecast to decline from 37.7 percent in 2005 to 33.9 percent in 2006. The B-median, in contrast, was projected to drop from 12.9 percent last year to only 10 percent this year.

Moody’s explained that it was emphasizing the broader non-financial public sector finances in the Philippines because of the contingent liabilities to the national government embedded in government-owned and controlled corporations.

Among the largest loss-making entities, Moody’s said, were still the National Food Authority and the National Power Corp. Although the Napocor’s deficit declined in 2005, the credit rating agency said the total non-financial public sector debt remained at around 90 percnet of GDP in 2005.

"Moreover, 64 percent of such debt is foreign debt, close to the median for B-rated countries, making this sector vulnerable to exchange rate shocks," Moody’s said.

Moody’s said it was also concerned about the fact that while the country’s gross international reserves (GIR) was rising to historical levels, merchandize exports grew by only 2.5 percent in the first 11 months of the year.

The bulk of the GIR growth, Moody’s pointed out, came from remittances from overseas Filipino workers which grew by 28 percent in 2005 to almost $11 billion.

"These suggest some improvement but residual underlying weakness," Moody’s said.

Moody’s said its "vulnerability indicator" placed the country’s risk at 79.2 percent compared to the B median of only 45.9 percent.

"In conclusion, downward pressure on the Philippines’ B1 rating could be relieved through more progress in the vital area of fiscal consolidation," the agency said.