MANILA -- Japan is in danger of slipping from its AA- credit rating if public debt continues to rise and if reforms are held up as its unpopular government struggles to get support for tax measures, debt watcher Standard & Poor's said on May 3.
Indonesia should impose financial sector reforms and the Philippines needs to reverse its weak revenues and continue to lower debt levels for both countries to get a ratings upgrade, said Kimeng Tan, S&P's senior director for sovereign ratings, Asia Pacific.
"If the political environment deteriorates a lot worse than what it is today, then we may have to take away support from the policy front, in which case the rating may come down," Tan told Reuters in an interview regarding Japan.
"If their debts continue to pile up very quickly, we may also move the rating down if there's no offsetting change," he said. S&P has a negative outlook on its sovereign rating on Japan.
Japan's debt burden is the heaviest among industrialized economies and while it wants to raise taxes to shore up state finances, its ruling Democratic Party lacks the majority needed to push reforms in parliament.
Weak growth prospects for Japan are also slowing tax reforms, such as a contentious plan to double the 5 percent sales tax by 2015, which may hurt consumer spending.
"With reform, consumer spending will slow, and that will turn a weak scenario to an even weaker growth scenario," Tan said. "That's going to be very tough."
S&P has a positive credit outlook for both the Philippines and Indonesia. It has yet to raise Indonesia to investment grade, unlike Moody's Investor Service and Fitch Ratings which moved to lift Southeast Asia's largest economy to investment grade earlier.
Tan said he was concerned about recent policy changes in Indonesia, particularly in the mining sector that may turn off investors, although general investor confidence remained relatively strong.
He said Indonesia remained susceptible to a global liquidity crunch due to the private sector's reliance on offshore funding.
"If their external position strengthens, to the (same) extent that the Philippines is enjoying, then we have less to worry about from a sudden stop in global financial markets," Tan said. "Then obviously that would help the rating, that can take place more quickly because it is easier to build reserves than implement difficult reforms."
He said that if the Philippines' debt levels continue to shrink -- with the debt-to-GDP ratio at a 13-year low of 50.9 percent -- and it pursues reforms to raise revenue, "then we can also move the rating."
"Over the next 6 to 18 months there is a one-third chance that it will go up," Tan added.
S&P rates Philippine sovereign debt two notches below investment grade.
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