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".