BY JIMMY C. CALAPATI

London-based Fitch Ratings yesterday said it is maintaining its stable outlook for the country, but warned of a possible downgrade.

Fitch affirmed the national government’s long-term foreign and local currency issuer default ratings (IDRs) at "BB" and "BB+," respectively.

The agency also affirmed the short-term IDR at "B" and the country ceiling at "BB+."

The outlook on the ratings is stable.

But the credit rating agency warned of a possible negative rating if the government does not manage its expenses and raise the necessary revenues.

James McCormack, head of Asia sovereigns at Fitch said that "while the Philippines has not been directly exposed to some of the most serious aspects of the international financial crisis, including, for example, severe stresses affecting the domestic banking system, it is not impervious to the deterioration in global economic growth prospects."

Fitch, thus, further cut its growth forecast to 0.1 percent, from the April forecast of 0.5 percent, due to the slowdown in consumer spending and overseas remittances as well as the contraction in exports.

"Based on a sharp reduction in exports, which is expected to be only partially offset by weaker imports, and a forecast 6.8 percent decline in remittances, the agency forecasts lower Philippine GDP growth in 2009," McCormack said.

The new forecast is below the downscaled forecast range of 3.1 to 4.1 percent by the Development Budget Coordinating Committee.

Fitch forecasts a fiscal deficit of P271 billion, excluding P5 billion in privatization receipts, equivalent to 3.5 percent of GDP.

"The fall in tax revenue in the first quarter will be very difficult to make up in the remainder of the year as the economy slows," McCormack said.

Government revenue was down by 4 percent in the first quarter, marking the weakest Q1 revenue outturn in 22 years.

Fitch assumes there will be further fiscal policy adjustments as the year progresses, and the agency expects spending to be slightly below the current target by year-end.

"Consequently, if forecast increases in spending are not reversed once the economy begins to recover, or revenue collection is not stepped up considerably, there is a risk that Philippine government debt ratios may deviate further from the ‘BB’ medians, with possible negative rating implications," McCormack said.

The forecast increase in the Philippine fiscal deficit in 2009 is in line with those of other "BB"-rated sovereigns, as is the deficit level itself.

"In terms of government debt, however, the Philippines compares unfavorably with its rating peers," McCormack said.

In 2008, the Philippine national government debt/GDP ratio was 56.3 percent, compared to the "BB" consolidated general government debt median of 30.6 percent.

The debt/revenue ratio is even more telling, with the Philippines at 360 percent versus the peer median of 141 percent.

Fitch has long considered the Philippines’ low government revenue base—among the lowest of all rated sovereigns—to be a fundamental rating weakness.

With a much weaker economy and elections due next year, the agency does not believe revenue enhancement will be a short-term policy priority.

Fitch expects remittances to continue to fall gradually in 2009.

Overseas remittances were $16.4 billion in 2008 (10 percent of GDP), providing critical support to economic growth by supplementing household income.

Remittance inflows also more than offset the $12.6 billion trade deficit, resulting in a $4.2 billion current account surplus.

Remittances were still growing year-on-year in February 2009, but they peaked in June 2008 and have been trending lower, consistent with the state of the global economy.

Taking changes in remittances and the trade balance into account, Fitch forecasts a halving of the current account surplus this year to $2.1 billion.

"Combining the current account balance and external amortization payments, the Philippine gross external financing requirement for 2009 is forecast at $2.8 billion, equivalent to 7.3 percent of end-2008 foreign exchange reserves," McCormack said.