Philippines Ratings And Negative Outlook Affrmd By S&P.

NEW YORK--(BUSINESS WIRE)--Sept. 25, 1998--Standard & Poor's today affirmed its double-'B'-plus long-term foreign currency sovereign and senior unsecured credit ratings and its single-'B' short-term foreign currency rating on the Republic of the Philippines. Standard & Poor's also affirmed its triple-'B'-plus long-term local currency and senior unsecured credit ratings and its 'A-2' short-term local currency rating for the Republic. The outlook on the long-term ratings remains negative.

In conjunction, Standard & Poor's affirmed its double-'B'-plus long-term counterparty and senior unsecured ratings and its single-'B' short-term foreign currency rating on Bangko Sentral ng Pilipinas (BSP). Standard & Poor's also affirmed its triple-'B'-plus long-term and 'A-2' short-term local currency ratings. At the same time, Standard & Poor's affirmed its double-'B'-plus long-term foreign currency corporate credit and senior unsecured ratings on National Power Corp. (NPC). The outlook on the long-term ratings for both entities remains negative.

The ratings for the Republic are constrained by:

-- Poor external liquidity. External debt service, including short-term debt, could approach 40% of exports in 1998, above the median of double-'B' category sovereigns. The country's balance of payments remains vulnerable, with total short-term debt, including nonresident deposits, estimated to be nearly equal to official foreign exchange reserves.

-- Weak public finances that will come under increasing strain as the economy contracts this year. Despite limited tax reforms last year, the tax base remains narrow and tax evasion remains high. Revenue shortfalls could raise the fiscal deficit to 2% or more of GDP this year, increasing government dependence on mainly short-term domestic debt. Nondiscretionary expenditures will likely exceed 70% of total spending, further reducing the government's already limited fiscal flexibility.

-- The government's limited ability to absorb contingent liabilities from the banking and corporate sectors. Standard & Poor's estimates that nonperforming bank assets, including restructured loans and foreclosed real estate assets, could exceed 20% of gross loans next year. However, Philippine banks enjoy greater capital flexibility to absorb bad loans compared with banks in Thailand, Indonesia, and Malaysia, mitigating the likelihood and extent of any potential official support.

The ratings are supported by:

-- A strong export sector that has performed better than its Asian counterparts in the last two years. Export growth of nearly 20% so far this year is projected to reduce the country's total external debt burden to nearly 100% of exports from 165% four years earlier.

-- A relatively stable and open political system. The country's vibrant democracy facilitated a smooth transfer of power this year while maintaining policy continuity. Privatization and structural and regulatory reforms -- such as the deregulation of oil prices earlier this year -- have liberalized most sectors of the economy in recent years, limiting but not eliminating political intervention in business and investment decisions. As a result, the asset-quality problems of the banking system are expected to be more manageable than in many other Asian countries.

OUTLOOK: NEGATIVE

The negative outlook reflects the risk of a potential decline in external liquidity and in financial flexibility resulting from worsening regional economic conditions or from financial mismanagement. While the Philippines has been affected less severely by the Asian financial crisis than most of its neighbors, the country remains vulnerable as both the government and the banking sector remain dependent on external financing. If confidence in the government's financial policies were to decline, the banking sector could come under greater stress from reduced access to external funding and potential withdrawals of foreign currency deposits, which comprise about 30% of total deposits.

An increase in the degree of perceived favoritism in financial and fiscal policies could weaken investor confidence, potentially contributing to capital flight and to further pressures on the exchange rate. Moreover, failure to maintain fiscal and monetary restraint could undermine the country's credit standing. However, a continued commitment to structural reforms, measures to bolster public finances, and a proactive and effective management of potential problems in the financial system could stabilize the Philippine's credit rating, Standard & Poor's said.

Copyright 1998, Standard & Poor's Rating Services