RP reels from two-notch credit ratings cut

RP reels from two-notch credit ratings cut

Agence France-Presse, Manila

Confidence was hit on Wednesday by a devastating two-notch cut in
the Philippines's sovereign credit ratings by Moody's Investors
Service just days after deadly bombings rocked the financial
district and the south.

The rating action pointed again to a damaging build-up of
public debt, the government's main worry after President Gloria
Arroyo conceded last year that Manila was fast approaching a
fiscal crisis.

The peso dived to near 55 to the dollar levels and stock
prices gave up hefty early gains moments after Moody's announced
it had docked the country's long-term foreign- and local-currency
ratings.

"We believe Moody's decision is quite severe but we take this
as a challenge to pursue reforms with a greater sense of
urgency," said President Gloria Arroyo's spokesman Ignacio Bunye.

The ratings cut followed a series of bombings in Manila, and
the southern cities of Davao and General Santos late on Monday
that claimed 12 lives and injured 145 others.

Police said the attacks were linked to a bloody Muslim revolt
now in its second week on the southern island of Jolo. The
government says the Abu Sayyaf, a militant Muslim group that is
on the U.S. government's terrorist blacklist, is involved in the
violence.

Moody's also expressed concern over the bombings, which raised
fresh concerns over the security situation in the country.

"Ongoing political and social unrest also undermines efforts
to re-establish confidence," it said.

"The stock market may have managed to stand up after the first
blow but the second one was too much," said Jose Vistan of AB
Capital Securities, referring to the bombings and the credit
rating action.

Arroyo and analysts both insist that while the series of
bombings and unrest in the Philippines have drawn global
attention, the economic impact should be transitory, with tourism
taking the most of the immediate fallout.

The United States, among others, warned its citizens to
exercise caution while in the Philippines.

"If we have the right infrastructure -- after all terrorism
occurs all over the world and the Philippines is one of the best
in fighting terrorism -- we would still be able to attract
foreign investments," Arroyo said on Tuesday.

Finance Secretary Cesar Purisima, who insisted that "the
market has priced (Moody's action) in," said he hoped "the market
will see through this downgrade and all those noises to realize
there has been a change in the dynamics in the Philippines."

However, after trading at five-year record levels early
Wednesday, the Philippine Stock Exchange composite index closed
11.62 points or 0.56 percent lower to 2,078.48.

The peso fell to 54.88 to the dollar from 54.695 late on
Tuesday.

Moody's action was more drastic than Standard and Poor's,
which cut its sovereign ratings by a notch last month.

A single downgrade adds between 1.0 and 1.5 percentage points
to the interest charge on government issued debt, according to
Central Bank of the Philippines estimates. A two-notch cut would
be more costly.

Moody's lowered Manila's foreign-currency rating for
government bonds to B1 from Ba2 and the long-term foreign-
currency country ceiling for bonds to B1 from Ba2. The outlook on
all the ratings is stable.

Moody's said "the large build-up in government and external
debt introduces heightened vulnerability to shocks despite recent
efforts by the government and legislature to enact fiscal
reforms."

It cited slow and difficult progress in Arroyo's efforts to
shore up state finances, which it acknowledged were "politically
painful choices".