Improved RP credit rating possible, says S&P

Despite the ongoing global turmoil, Standard & Poor’s said the country’s credit rating could be raised once the government’s revenue-raising capacity has undergone “fundamental improvement”.

S&P announced yesterday that all current credit ratings on the Philippines’ external borrowings will be retained and that the country’s outlook remains stable, reflecting its solid external liquidity and fiscal improvements.

S&P noted however that while Asia-Pacific economies have so far proven reasonably resilient to global financial markets dislocation, risks and uncertainties loom for the region.

“Barely more than 10 years on from 1997, Asia-Pacific is being buffeted by the shockwaves of yet another major dislocation in global markets. This time, however, the epicenter is much further away and Asia-Pacific sovereigns are in much better shape to withstand the impact,” said Standard & Poor’s sovereign analyst Kim Eng Tan.

But Tan added that the Asia-Pacific region is not entirely insulated from developments in advanced financial markets and the relative respite this region is enjoying currently is likely to be temporary.

Apart from the worsening global liquidity conditions, other challenges also have the potential to hurt Asia-Pacific sovereign creditworthiness in 2008 and 2009, Tan said.

These include national politics and inflation, as well as the deterioration of external and fiscal indicators.

S&P had put negative outlook on sovereign ratings of Pakistan, Sri Lanka, and Vietnam to reflect one or more of these factors. But other Asia-Pacific sovereign ratings are currently stable, including the Philippines.

However, Tan said the same factors also trouble some of these stable countries and could trigger negative changes to the outlook or ratings.

In S&P’s Report Card, it was said that the stable outlook balanced the country’s “increasingly solid external liquidity and significant improvements in general government and public-sector financial performance against continued, albeit easing, risks to revenue and deficit targets in light of collection inefficiencies and a narrow base.”

S&P analyst Agost Benard said the ratings could be raised if there was evidence that revenue-generating capacity had undergone a fundamental improvement.

This would include ensuring a sustainable, expanded revenue base provides for continued fiscal consolidation and debt reduction while also allowing for ongoing capital spending.

“However, the ratings could be lowered if fiscal correction is endangered by stalling reforms or weakening revenue effort, such that fiscal deficits begin to rise, or that budget goals can only be met through reigning in spending at the expense of future growth prospects,” Benard said.

Benard noted that broadly in line with expectations, growth in the Philippine economy was easing further. Second-quarter growth in gross domestic product was recorded at 4.6 percent year-on-year, while first-quarter growth was revised to 4.7 percent from 5.1 percent.

“With some further softening likely in subsequent quarters, and accounting for the base effect of last year’s record high growth, full-year growth of

about 4.5 percent was is now expected, compared to last year’s 7.3 percent,” Benard said.

Besides slowing external demand, Benard said growth was also being depressed by weaker private consumption, traditionally the main pillar of growth.