PHL investment-grade hopes dim

Published on Thursday, 18 October 2012 21:26

Written by Jun Vallecera | Reporter

Some of the country’s weak fiscal underpinnings and the perception that President Aquino’s reform momentum has stalled have prompted the sovereign ratings firm Standard & Poor’s (S&P) to cite potential delay in the country’s bid to attain investment-grade status.

The hoped-for credit upgrade, which would make future foreign borrowings significantly cheaper than possible right now, may be delayed as long as two-and-a-half years.

In a report originating from its Singapore offices on Thursday, S&P cited the country’s “weak fiscal profile and high interest burden on its public debt” as potentially damaging to the country’s bid for investment-grade status.

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Such weakness was attributed to the country’s “narrow revenue base and the large portion of expensive commercial debt,” which act as the proverbial Damocles sword ready to swing down and cut short the search for a more prestigious standing among countries generating part of their funding requirements from overseas markets.

While the Philippines does not seek foreign funds for now, a credit upgrade would help elevate the country’s status as borrower of good standing and help highlight its macroeconomic achievements, as well.

But according to S&P, the Philippines and neighboring Indonesia “both have some weaknesses to address before they are likely to break into the investment-grade rating category.”

“For both sovereigns, low per-capita income levels remain a rating constraint. The wealth levels in Indonesia and the Philippines imply a low revenue base for the government to draw on, significant human and physical capital shortcomings, and hence, less fiscal and political flexibility to modify policy to avoid default in the event of adverse economic developments,” S&P said.

This has particular significance, for example, to current efforts by President Aquino to generate more excise revenue from the alcohol and tobacco industries, efforts acknowledged to have been at risk of serious revenue erosion based on the quality of legislative proposals at various stages of deliberation in the halls of Congress at present.

Finance Secretary Cesar V. Purisima has pushed for P60-billion annual incremental revenues from excisable products, for instance, but had to fight in recent days for a potentially larger tax take as his prime supporter in the Senate came up with an excise plan significantly inferior to what they had in mind.

Purisima and others in the President’s Cabinet economic cluster fear the allegedly watered-down excise plan proposed in the Senate would undermine the reform momentum, thus far attained and have fought for its revision.

S&P noted the improvements in the country’s political backdrop and policy settings led it to raise the country’s sovereign rating to “BB+” from “BB” in July this year, putting it a notch short of investment grade, or from a rating of “BBB-” and above.

“The stable outlook on the Philippines indicates that risks to the ratings are balanced,” S&P analyst Agost Benard said.

“The Philippines has narrowed its fiscal deficits, lessened its reliance on foreign savings, and rationalized the public sector. A more conducive political setting has replaced the turbulent and obstructionist environment that prevailed for well over a decade,” he said.