Fitch–London–5th October 2001: Fitch, the international rating agency, today published a sovereign comment in which it argues that the Stable Outlook assigned to the Philippines’ sovereign ratings of BB+ (foreign currency) and BBB– (local currency) in March 2001 remains appropriate, despite the deterioration in the external environment.
The agency says that the Stable Outlook is underpinned by three factors:
- A flexible exchange rate regime, combined with a still comfortable international liquidity position;
- Modest public external financing needs of USD2.7bn in 2002, of which half is expected to come from official sources;
- Diminished political risk underlined by a strong popular mandate for a government that has committed itself to fiscal discipline and reform.
Since its victory in national elections in May, the Arroyo administration has projected the image of a government committed to fiscal discipline and reform and the fiscal accounts for 2001 have remained broadly on track. An important barometer of structural adjustment has been the recent passage of an omnibus power bill, opening the way to the privatisation of Napocor next year, while a benign macro-economic policy framework has been supportive of growth. However, Fitch cautions that still high levels of public and external debt leave the authorities with relatively little room for manoeuvre, accentuating the Philippines vulnerability to external shocks.
Like the rest of Asia, the Philippines has sustained a severe external shock with the downturn in external demand in the US, particularly for electronics products. Workers remittances, chiefly from the US, are also set on a declining trend. Nonetheless, Fitch still expects the Philippines to record a current account surplus in 2001-02, albeit much diminished from 2000. Some concerns attach to the Muslim insurgency in the south of the country, which could damage the foreign investment climate if the government’s current peace initiative fails, but capital flight appears to have abated since the beginning of the year.
Fitch says a protracted downturn in the US would put the ratings under pressure, especially in the absence of an appropriate policy response. However, at this juncture, the government’s projected demands on international capital markets look modest compared with other BB+ credits like Mexico and India, and gross external debt in USD terms is forecast to remain virtually flat through 2002. The collapse in current external receipts will result in a significant deterioration in the Philippines’ solvency ratios, but external debt service remains modest at 19% of current external receipts and the international liquidity ratio is still comfortably above 100%.
A full version of the Fitch comment – ‘Philippines: Weathering the storm’ – is available on the Fitch web site at www.fitchratings.com.