SINGAPORE, April 1 (UPI) -- With high political uncertainties and rising economic risks related to a widening budget deficit and a mounting pile of debt, warning bells are being raised in the markets that the Philippines could face an Argentina-like crisis in a few years time if it does not address its current problems.
"For the time being, an Argentina-like crisis is unlikely, but if the
fiscal deficit continues on the same trajectory as over the last 3-5 years
then I would be concerned (about a crisis) over the medium term," Sin Beng
Ong, analyst at JP Morgan said.
On Tuesday, the International Monetary Fund issues a stern warning about the country's high deficit and debt, expressing "serious concerns" and saying the government's plan to cut its fiscal deficit to 4.5 percent of gross domestic product this year from 4.9 percent in 2003 was not ambitious enough.
"My impression is that the IMF is warning about the medium-term. That if the country doesn't improve its fiscal position and doesn't fight the rising debt to GDP ratio, it will increase its risk of being able to refinance its debt," says Ray Farris, analyst at CSFB.
"Is there a possibility of a crisis over the next 12 month, no. Is there a possibility for the next several years, sure. Much will depend on the outcome of the election and how the winner manages fiscal policy and what the government does with the power company, Napocor," he adds.
Currently much of the rising debt burden is related to financing the state-owned Napocor's annual losses. With the company under pressure not to raise electricity rates for fear of a public backlash (especially in an election year), it has had to raise significant amount of money to fund its operation. This year, the company is expected to borrow $2 billion.
The IMF report highlighted a need to reform the power sector and urged the government to raise prices and implement a universal charge.
The national government debt rose to 94 percent of GDP in January and given
the projected fiscal deficit, debt is likely to rise further before the end
of the year. But despite the rising external debt levels, economists do not
think that a debt crisis is imminent.
"The total level of debt is high, but still manageable as long as the
maturity is spread out (which is currently the case)," says Ong.
Most of the Philippines' external debt is medium and long-term with short-term debt relatively stable at about $6 billion. "There is no risk of imminent crisis of liquidity in the Philippines. We estimate that external debt amortization and principal repayment will amount to about $7.9 billion, which is comfortably covered by foreign reserves of $15.7 billion," Farris says.
But Ong also points that the debt servicing cost has been growing to 36
percent of revenues in 2003 from 22 percent in 1998. "What this means is
that the government has less fiscal discretion over expenditures," Ong
says.
Indeed, last month Central bank Governor Rafael Buenaventura warned the government needed to act immediately to cut the deficit or risk public debt becoming unsustainable within three years.
If worries about the upcoming May 10 elections have pushed up domestic yield, so far, foreign investors do not appear overtly concerns as the country's cost of borrowing (which reflects the risk associated with the country) has only increased slightly. But Ong warned this cost could start rising if investors see no signs in revenues improvement and the budget deficit balloons further.
And if the country is not close to facing a financial crisis, the rising levels of public debt, slow pace of fiscal consolidation and political uncertainty are causing the Philippines to be a deteriorating credit.
Representatives from credit agency Standard & Poor's are currently in the Philippines evaluating the country and many analysts expect this trip to lead to lowering of the outlook on the Philippines 'BB' rating from the current "stable" to "negative".
In January, Moody's cut its rating by one level to Ba2, two levels below investment grade and kept its negative outlook, and analysts are speculating it could cut the rating again within 12 to 18 months.
The presidential election is still a close call. Latest polls showed President Gloria Macapagal-Arroyo leading marginally after her key challenger actor Fernando Poe Jr lost some ground after questions were raised about his being a natural-born Filipino, which nearly disqualified him. However, if former education secretary Raul Roco or Senator Panfilo Lacson were to drop out of the race, Poe would have an increasing change of winning, observers said.
Poe frightened bond markets recently when he said he would look at the possibility of restructuring Philippine sovereign debt if elected.
Meanwhile, there are also concerns CalPERS - the largest U.S. pension fund - may decide to pull out its $67 million invested out of Manila stocks. This would be a huge blow not only to the investment community, but the image of the country as well, economists said.
