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Fitch Maintains Stable Ratings On Philippines (January 23, 2002)

London-based international rating agency, Fitch, has maintained a stable outlook on the Philippines' sovereign ratings.

At the same time, Fitch assigned a long-term foreign currency rating of BB+ on the recently launched $750-milion global bond issued by the Philippine government. In maintaining its stable outlook for the country, Fitch said that as the largest source of emerging market sovereign bonds in Asia, the Philippines has displayed a remarkable resilience to recent external developments.

Like the rest of the countries in Asia, Fitch said the Philippines sustained a severe external shock last year with the downturn in the US, particularly for electronic products that led to a 15-percent contraction in exports. Despite this, Fitch said the country's debt service remains modest at 19 percent of current external receipts, reflecting a favorable maturity structure.

Last October, Fitch also affirmed its stable outlook on Philippine sovereign ratings, citing diminished political risk following national elections last May, a flexible exchange rate regime that helped to preserve a current account surplus and the government's modest external financing needs in 2002.

The agency, however, warned that a protracted downturn in the US would put the Philippines' ratings under pressure, especially in the absence of an appropriate policy response. Fitch said continuing high levels of public and external debt leave the country relatively little room to maneuver and 2002 marks the beginning of a medium-term deficit and debt reduction program.

Fitch added that at this stage, government's projected demands on international capital markets for this year at $2.8 billion, looks modest compared with other BB+BB credit Mexico, Colombia and India.

Fitch also expressed concern about the Muslim insurgency in Mindanao, which could damage the foreign investment climate if it deteriorates further, although it added that capital flight appears to have abated since the Estrada administration.

Aside from Fitch, a team from New York-based international credit rating agency Moody's Investors Service (Moody's) was in Manila last month to review the country's creditworthiness.

The Arroyo administration is hoping Moody's will at least retain its current negative outlook for the Philippines instead of a credit downgrade, which will make it harder for the country to get good deals on its offshore borrowings.

Currently, Moody's credit rating on the Philippines is below investment grade or Ba1, similar to Standard & Poor's (S&P) and IBCA Fitch's ratings of BB+.

S&P cited stumbling blocks that keep the credit rating agency from improving or changing the country's sovereign ratings; High government debt and rising fiscal inflexibility; narrow tax base, with tax revenues falling by more than three percentage points as a share GDP since 1997; weak banking sector with non performing loans exceeding 15 percent of total loan portfolio.

Last September, the government was able to avert a credit ratings downgrade after convincing these credit rating agencies that it will be able to meet its fiscal targets despite the economic fallout that resulted from the terrorist attacks in the US.

A credit ratings downgrade has the potential to starve the country of much-needed access to international debt and capital markets at a time when it needs to finance its fiscal deficit with a large amount of foreign borrowings.

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