MANILA, Philippines -- Fitch Ratings on Friday affirmed the Philippines' long-term foreign currency Issuer Default Rating (IDR) at 'BB', its long-term local currency IDR at 'BB+', its Short-term foreign currency IDR at 'B' and the country ceiling at 'BB+'.

The outlook remains stable, with the Southeast Asian nation's relatively strong external financial position supporting its sovereign credit ratings, Fitch said in a statement.

"Ongoing current account surpluses, driven largely by overseas workers' remittances, are contributing to a steady reduction in the country's external debt ratios, and have allowed for a significant increase in official foreign exchange reserves," said Franklin Poon, director at Fitch's sovereign group.

Fitch forecasts an increase in the merchandise trade deficit to more than $10 billion in 2008, as export growth slows and imports increase on the back of higher oil prices.

Remittances are expected to exceed $16 billion this year equivalent to 9.0 percent of gross domestic product and more than offsetting the trade deficit, it said, even assuming a slowdown in the growth rate of these inflows.

Fitch forecasts remittances to increase gradually in 2009 and 2010, and the current account surplus is projected to be about 2.5 percent to 3.0 percent of GDP this year.

The agency said net capital flows are forecast to be much weaker in 2008, as the Philippines is affected by the reduction in global investors' risk appetite amid slowing growth in advanced economies and lingering uncertainty in credit markets.

Net portfolio equity inflows averaged about $2.4 billion annually between 2005 and 2007, but are projected to fall to $250 million in 2008, it said.

"The Philippines' gross external financing requirement (current account balance plus medium-term external amortisation payments) is forecast at only $660 million in 2008, which is low relative to other 'BB'-rated sovereigns, and especially low for a net oil importer," it said.

From 2.7 percent of GDP in 2005, Fitch forecasts the fiscal deficit will narrow to 2.1 percent of GDP in 2008.

"The reduction compares favorably with the rating peer group median, which was virtually unchanged at 1.9 percent of GDP over the same period," it said.

"Despite the improvement in the fiscal balance, Fitch retains the view that Philippine public finances are fundamentally weak and in need of a significant boost in revenue."

As spending pressures mount given Manila's aggressive infrastructure development plan, Fitch said it is critical that the various measures to enhance revenue collection begin to deliver more meaningful results.

"Continued reductions in government debt ratios depend on containing the budget deficit, which, in turn, will require increased revenue to offset anticipated spending increases," it said.

Fitch also said it expects further monetary tightening in the Philippines and forecasts a slowdown in economic growth this year to 5.3 percent from 7.2 percent in 2007.

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