January 05, 2006 | Cbonds
|Standard & Poor's Ratings Services |
said today it assigned its 'BB-' senior unsecured debt rating to the Republic
of Philippines' (foreign currency BB-/Negative/B, local currency
BB+/Negative/B) proposed US$1.0 billion to US$1.5 billion global bond issue
maturing in 2031.
The sovereign credit ratings on the Philippines reflect its high debt and
low fiscal flexibility. Net general government debt, excluding guaranteed
contingent liabilities of nonfinancial public enterprises, is estimated at
about 72% of GDP for 2005, compared with the 'BB' median of 45.5%. The high
level of indebtedness and constrained revenue base from which to service debt
is highlighted by a debt-to-revenue ratio of 538%--more than double the 206%
for similarly rated countries. This translates into an interest burden of
close to 40% of general government revenues, which could grow further without
a solid and sustained increase in revenues, given rising domestic and global
Recent administrative and legislative advances reversed falling tax
collections, but much of the gains in fiscal consolidation over the past two
years came from cutting needed expenditure, in turn, impairing future growth
"Latest official estimates point to a 2005 deficit outcome of less than
3% of GDP, but they also suggest that, as before, much of the improvement
derives from the expenditure side, and that the Bureau of Internal Revenue
collection target for the year may not have been met," said Standard & Poor's
credit analyst Agost Benard. "Thus, the underlying fundamental revenue
weakness appears to persist, and a lasting improvement in that remains
contingent upon expanding the tax base, and curbing tax evasion."
"The planned February increase of VAT rates to 12% from 10%, and the
implementation of other parts of the expanded VAT, should go some way in
addressing these issues, but effective administration and further reforms will
be needed to make the fiscal position less threatening and at the same time
allow for increased capital spending," added Mr. Benard.
Slow reform may increase the country's external vulnerability due to the
sovereign's large foreign debt. The government continues to rely on external
funding for a substantial part of its fiscal deficits, and close to 50% of its
total debt is denominated in foreign currency. Net external debt as a
percentage of current account receipts for 2005 was projected at 40.5%,
compared with the median of 28.8% for 'BB'-rated sovereigns.
The ratings on the Philippines, however, are supported by adequate
external liquidity. Prudent exchange-rate management and large and steady
remittance inflows generally ensure a safe level of external reserves.
Short-term liquidity risk for the Philippines is moderate, compared with its
similarly rated peers. For 2005, the ratio of gross financing requirement to
usable reserves (current account plus short-term debt plus amortization) was
projected at 78.5%, compared with the median 83.4% for sovereigns in the
Also supporting the ratings on Philippines is its record of economic
resilience in the face of external shocks and ongoing domestic political
uncertainty, reflected in average real GDP growth of 4.4% over the past six
years without significant fluctuation. This has served to moderate the
country's debt dynamics, and would provide a solid basis for further debt
reduction, if the appropriate fiscal policies are put in place.