S&P accorded the Philippines a speculative BB- rating on its long-term foreign currency while outlook is stable. The assessment was based on public sector and external debt profile and possible impact of increased interest rates and local currency depreciation.
Under our harshest scenario, the ratings on the Philippines (Brazil, Hungary. Turkey and Jamaica included) would come under pressure from raising real interest rates, S&Ps credit analyst Tim Reid said. On the other hand Argentina, Indonesia, Poland, Mexico, South Africa and Pakistan are less vulnerable to shocks.
However S&P said raising interest rates alone should not jeopardize ratings.
The report Turning up the heat: The impact of Stress Tests Sovereign Debt Payments said that although rating pressure would increase, the governments (such as that of the Philippines) could take countervailing measures to preserve their creditworthiness such as raising their primary balances or by taking further steps (so that) public debt is less exposed to changing market conditions.
Earlier S&P said the Philippines is the most vulnerable to the potential effect of the US rate increase among emerging market sovereigns, due to its weak fiscal position and high debt stock.
Last April 7, due to rising inflation rate the Monetary Board, policy-making arm of the Bangko Sentral ng Pilipinas adjusted key policy rates by 25 basis points to seven percent overnight borrowing and 9.25 percent for overnight lending or repurchase rate.
The last adjustment wherein the MB lowered the rates was in July 2003.
In a statement the MB emphasized that the increase in the BSPs policy interest rates is chiefly a preemptive move to prevent inflation expectations from spiraling away from the inflation target. That the policy action is intended as a response to rising inflation expectations, and underlines the BSPs commitment to fighting inflation.
The MB said it decided to increase the BSPs policy interest rates by 25 basis points since in its assessment of the outlook for inflation and output, demand-driven inflationary pressures remain limited at present given fairly high unemployment, modest credit growth, and spare capacity in manufacturing.
The BSP also cited exchange market pressure, which remains as a risk to inflation expectations, given the likelihood of declining interest rate differentials and possible adverse shifts in investor sentiment due to delays in needed tax measures. Recent increases in liquidity growth due to external inflows are also being monitored closely, because of the potential implications of the additional liquidity for exchange market stability and the inflation path. (LCC)
