Moody's: Philippines vulnerable due to high public-sector debt

Note: This is a revised version of the report published on April 17.

Moody's Investors Service said in an annual report on the Philippines that its B1 ratings and negative outlook recognize the progress made the country's fiscal reforms, but it noted that the Philippines' exceptionally high public-sector debt leaves it vulnerable to shocks.

Importantly, the Moody's report also recognized that the country's strengthened external payments position provides a buffer to transitory shocks or policy missteps, allowing time for fiscal consolidation to become more entrenched.

Still, even assuming a best-case scenario for fiscal reform this year, the ratio of national government and non-financial public sector debt to revenue will likely stand around 400% at the end of 2006, a level that is well above that of similarly rated countries, the agency said.

"A fundamental strengthening of both the fiscal and external payments positions would be necessary to improve the rating," Moody's vice president Thomas Byrne said in an agency release.

"Specifically, the achievement of the 2006 budget targets for 75 billion pesos in additional value-added tax revenues and the reduction of the national government deficit to around 2.1% of GDP would lead Moody's' to consider changing in the ratings outlook to stable from negative."

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