RP on road to improving public debt ratios — Fitch

London-based Fitch Ratings Inc. said the Philippines is back on the path of improving its public debt ratios, noting that the country might be able to avoid a downgrade of its credit ratings over the short and medium-term.

In a special report, Fitch pointed out that the debt burden of the National Government (NG) is projected to decline to 67.5 percent of gross domestic product (GDP) – the lowest level since 2002.

Fitch noted that the landmark legislation of the increase in the value added tax (VAT) rate had significantly improved its reading of the country’s prospects in the short and medium term.

The report was released after Fitch upgraded its outlook rating on the country from "negative" to "stable" although the credit rating agency retained its current credit rating of "BB" on the country’s foreign-denominated long-term borrowings.

According to Fitch, its forecasts showed "significantly improved public debt dynamics" compared with those made previously, due mainly to the likelihood of primary fiscal surpluses of over three percent of GDP in the near term.

Fitch said that the strong likelihood of the VAT increase from 10 percent to 12 percent and the plan of the Arroyo administration to spend much of it on deficit reduction would improve the country’s public finances fast enough to avoid the downgrade in credit ratings.

Fitch acknowledged that the conditionality attached to the VAT increase resulted from the outcome of the political bargaining that was required to get the package through Congress.

"Nevertheless, both conditions are currently being met and are highly likely to be met in 2005," Fitch said, adding that the VAT law was not watered down and in fact involved a broader set of tax measures than was envisaged.

The Department of Finance (DOF) estimated that the package would raise just under P30 billion in additional revenue this year and around P100 billion next year, based on an assumed 70-percent collection rate.

"Fitch takes a more conservative view, but nevertheless expects a revenue haul of around P80 billion or 1.3 percent of GDP in 2006," said Fitch analyst Brian Coulton.

The overall deficit, including interest payments, is forecast to fall to 2.7 percent of GDP in 2006, which would be the lowest since 1998 despite the NG having absorbed additional interest payments from the assumption of National Power Corp.’s debts this year.

In terms of the projected debt ratios, Fitch said NG debt would decline only modestly this year to 70 percent of GDP. However, Coulton said this is misleading as a guide to underlying government debt dynamics, since the NG absorbed P200 billion of Napocor’s debts.

Excluding this, Coulton said government debt would have been projected to decline by five percentage points of GDP by end-2005 to 66.4 percent, reflecting the increased primary NG surplus and healthy nominal GDP growth.