The Philippine telco industry is experiencing slowing growth but its popular cellular phone service will continue to drive growth and sustain high cashflows.

A study done by FitchRatings showed that a favorable regulatory regime will continue to help the big companies namely Philippine Long Distance Telephone Company and Globe Telecommunication.

Both PLDT and Globe have foreign stockholders, NTT DoCoMo for PLDT and SingTel for Globe.

The ratings agency said that there is a good growth outlook for internet and consumer broadband services since more Filipinos are buying PCs.

Broadband services however are not expected to contribute much to coffers within the next two years.

The study noted that the number of households with access to PCs grew 58 percent in 2006 to 1.4 million. The penetration rate however is a dismal eight percent compared with the penetration rate of 57 percent for mobile phones.

PLDT enjoys the bulk of the broadband growth considering that it has the most extensive wireline network in the Philippines.

Globe, however, is playing catch up.

Fitch warned that core mobile services are rapidly approaching maturity but will provide the cash flow stability for PLDT and Globe as they make the transition to new platforms and advanced technologies.

The two telcos however need to return more money to stakeholders at the time that growth is slowing and investment needs for new technologies rise.

Both companies, however, helped by the strong peso and substantial earnings managed to prepay debts and deleveraged significantly from 2005 to 2007.

Fitch pointed out however that risk has come into greater focus in recent months. In November 2007, PLDT approached bondholders to seek higher flexibility on certain covenant limitations, while Globe Telecom declared special dividends amounting to around 55 percent of prior year net income.

Fitch notes that these developments have not resulted in any negative rating action, but cautions that both operators have only moderate headroom for an increase in net debt at their current Local Currency IDR levels.

As well as facing increased shareholder demands, major operators are grappling with industry pressures in terms of slowing growth in traditional areas and rising investment needs for new growth areas such as consumer broadband.

Potential for market irrationality also remains a major risk (in view of historical trends), which could be exacerbated by increased maturity.

The regulatory regime effectively favours the leading operators, Fitch said, as it facilitates little change to the existing industry structure.

As a result, regulatory risk and competitive barriers are substantially higher for Digitel and other smaller operators.

With little progress on a new competition policy to date, and interconnection issues unlikely to be resolved anytime soon, Fitch believes overall regulatory risk for the major operators PLDT and Globe will remain low in 2008.