MANILA -- International credit rating agency, Moody's Investors Service said yesterday it will maintain its "negative" outlook on the Philippines' ratings despite the passage of economic reforms.

"Moody's believes that the Philippines will need to make more progress in fiscal consolidation before downward pressure is removed on its B1 ratings," Moody's said in a report.

Moody's said that while there had been progress in reducing the budget deficit in 2005 by implementing an expanded value-added tax, "more will be needed to bring the Philippines' exceptionally high public sector deficit down."

Finance Secretary Margarito Teves expressed dismay over the announcement, saying Moody's "should have put greater emphasis on (the government's) achievements in support of fiscal sustainability and deficit reduction." Financial markets had expected an upgrade at least in the credit rating outlook after the government's better-than-expected fiscal performance last year and the expansion of the value added tax (VAT) which began last month.

The expanded VAT, which increased the rate to 12 percent from 10 percent starting this month, has resulted in higher prices for some commodities, further battering the approval ratings of President Gloria Arroyo.

However, the president has stressed that these political sacrifices would have to be made for the economy to avoid a fiscal crisis. She has also expressed confidence it would result in an upgrade in the country's credit ratings.

The government succeeded in trimming its 2005 budget deficit to P146.5 billion, much lower than the official target of P180 billion and an actual deficit of P187.1 billion in 2004.

The government expects to raise an additional P75 billion in revenues this year from the expanded VAT, which will limit the budget deficit to P125 billion or 2.1 percent of gross domestic product (GDP.) It hopes to balance the budget by 2008.

Moody's said "political issues may distract the government from advancing fiscal adjustment," referring to moves to revise the constitution and the continuing efforts by the opposition to oust Arroyo.

Moody's originally downgraded its outlook on Philippines sovereign debt to negative from stable in July due to opposition charges that Arroyo cheated to win election in 2004.*AFP

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