System-wide asset quality and capitalization may deteriorate slightly from 2008 levels of 4.2 percent non-performing loans and a capital adequacy ratio of 14.6, the rating firm said.
However, potential worsening is likely to be capped by the absence of rapid credit growth and comfortable liquidity, it said.
"These factors are balanced against ongoing risks regarding the inadequacy of the revenue base and slow progress in addressing this, as well as questions over collection efficiency and policy response in the current economic downturn. Although to a large extent the sharp fall in fiscal revenues this year can be explained by cyclical factors, much of it was predictable. Offsetting measures on the revenue side that could have moderated the fiscal slippage were not forthcoming," Ogawa said.
S&P, however, noted that the May 2010 national elections may create moderate volatility and pose a distraction to policy making and implementation.
"But in our opinion, there is only a limited risk to policy continuity. Nevertheless, the resulting delay in passing and implementing fiscal reform measures currently in the legislature could re-ignite concerns over the medium-term fiscal trajectory," the rating firm said.
It said the outlook could be revised to positive if the government showed evidence of a renewed focus and commitment to fiscal consolidation and improvement in revenue collections.
"By contrast, the outlook would change to negative if indications emerge that the deterioration currently experienced in revenue performance and fiscal balance outcomes is not a transitory phenomenon, either because of weakening commitment to fiscal prudence, or due to policy paralysis in a new administration," Ogawa warned.
Finance Secretary Margarito Teves said the government welcomes S&P's latest credit action.
"We believe that this serves as a vote of confidence in the resiliency of the domestic economy having withstood the worst impact of the global crisis," he said.
"We will vigorously pursue our action plans at the [Bureaus of Internal Revenue and of Customs] to expand taxpayers' data base in improving collection efficiency. We are hopeful that Congress will support our proposed revenue enhancement measures, which should help us in improving our credit outlook to positive. This will also allow us to raise sustainable revenues that are needed to support continued economic growth," he added.
The Arroyo administration's budget deficit ballooned by 556 percent in the first five months this year, as expenditures to prop up the economy outpaced tax collections.
Economic managers earlier cut the country's growth target to between 0.8 percent and 1.8 percent after the sharp slowdown in the first-quarter to 0.4 percent.
They also raised the budget deficit ceiling to P250 billion, or 3.2 percent of gross domestic product (GDP), from the earlier P199 billion, or 2.5 percent of GDP.
An indicator of economic performance, GDP measures the value of final goods and services produced in a country, while the deficit-to-GDP ratio indicates how long a government can sustain revenue shortfalls.
To plug its deficit, the Philippine government has lined up a number of options to raise funds, including a plan to borrow in the Japanese debt market through the issuance of so-called Samurai bonds or IOUs, and the possible issuance of so-called ROPs or Republic of the Philippines sovereign bonds.
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