Raising the possibility of problems in the country’s balance of payments (BOP), Standard & Poors said the Philippines could resort to higher external borrowing to boost its reserve levels.

The global recession could deteriorate the balance of payments and force more foreign borrowing that would affect the country’s debt profile despite the apparent resilience shown by the economy in general, S&P pointed out.

The Bangko Sentral ng Pilipinas (BSP) is expecting the international reserve level to hit at least $38 billion this year but the balance of payments had been dwindling steadily since last year where it ended at around $88 million.

S&P said in a report that should the US recession last longer than expected, public finance would be hard hit, particularly in the economies where sustained economic contractions are expected.

Revenue shortfalls and expenditure pressures are likely to be large and would require the government to take on heavier debt burdens.

S&P said the Philippines is already financially-constrained and possibly experience rising debt burdens from a deteriorating currency or higher reliance on external financing.

“Under an extended recession scenario, we assume that a significant share of the fiscal shortfalls would have to be financed externally,” S&P said. “For this reason, public sector external debt of Indonesia, Vietnam and the Philippines would increase materially.”

In addition to budget financing, S&P said the Philippine government might decide to borrow externally to boost a reserve cushion or intervene in support of its currency.

“Confidence-sensitive currencies, such as in Indonesia and the Philippines, are expected to come under pressure in this scenario, potentially leading to external borrowing for balance-of-payments support,” S&P said.

 “Debt ratios could go back to the levels of four to five years ago, which would still be broadly consistent with their current ratings,” S&P said. “However, larger-than-assumed exchange rate movements could change these debt burdens sharply, as has occurred in past crises.”

The resulting deterioration in external positions could then push ratings of these countries into a lower category.

Analysts have already warned that unless the Arroyo administration would be able to accelerate its collection pace, the country’s tax collection shortfalls could worsen in 2009—a major threat to its credit ratings amid slowing growth.

Despite the developing problems over tax collection, however, US banking giant Citi said Philippine debt ratios required the least effort to stabilize compared with its neighbors in the region.

Looking at varying levels of fiscal sustainability in the region, Citi said in a report that among other emerging economies in East Asia, the Philippines only had to worry about its vulnerability to swings in its local currency.

Citi observed that in the Philippines, tax collection by the Bureau of Internal Revenue (BIR) which accounted for about two-thirds of total revenues, fell short of target by P2 billion (1.9 percent) in January-February 2009.

On the other hand, the Bureau of Customs which accounted  for 22 percent of total revenues, fell short by P3 billion or 9.6 percent of target in the same two-month period.

The impact of tax collection on the budget and the possible increase in borrowing requirements could put the country on a vicious cycle of even lower tax collection and higher debt.

“Government deficits per se are not bad, as long as they can deliver growth that would place the ratio of public debt –to-GDP on a sustainable path, i.e. does not end in a never-ending upward spiral,” Citi said.

In the Philippines, Citi said almost 60 percent of public external debt came from commercial sources which were generally more expensive but quick-disbursing with no conditions attached.