Moody's Investor's Service cut the Philippines long-term and foreign currency ratings by two notches Wednesday. The drastic cuts reflect investor concerns over the Philippine's massive government debt.
The credit rating agency Moody's announced the rating cut Wednesday, saying that recent tax reforms are having little effect on government debt.
The two-notch downgrade is a significant blow to the government, which has been saying that it is fully addressing its mounting public debt.
The cut pushes the Philippine's foreign debt rating to well below investment-grade. That means Moody's considers the government a very poor credit risk. As a result, the government and many Philippine businesses will find it more difficult to borrow money internationally and they will pay higher interest rates when they do.
Finance Secretary Cesar Purisima says the rating cut is too severe.
"Nevertheless, we will take this as a challenge to continue with our fiscal reform program," he said. "For my part I will continue to focus on improving our tax administration."
President Gloria Arroyo has promised to improve state finances through a series of controversial new tax laws.
But so far only one set of bills has been enacted and the president's reform package remains stalled in Congress.
The government spends nearly 40 percent of its annual revenues on interest payments for almost 70 billion dollars in debt.
Richard Ondrik is the senior programming specialist for the Philippines at the Asia Development Bank, a non-profit lending institution. He says the public debt is in large part driven by a bloated civil service and an inefficient tax system.
But he says the most obvious source of debt is the Philippine's public energy sector, which operates at a loss.
"So what Moody's is saying is, one, you have to get your power sector in shape. Two, the only way you're going to see more revenues is if you pass some new taxes and improve your collection efficiency."
President Arroyo backs a privatization plan for the National Power Corporation but little progress has been made.