RP’s credit rating next year hinges on EVAT hike to 12%

The adjustment of the expanded value-added tax (EVAT) rate from 10 percent to 12 percent in February next year will be pivotal to the country’s credit rating in 2006.

As Moody’s Investor Service wrapped up its annual ratings review this month, the next criterion under close watch by credit rating agencies will be the scheduled adjustment in the EVAT rate.

According to the Investor Relations Office (IRO) of the Bangko Sentral ng Pilipinas (BSP), credit rating agencies have reacted with cautious optimism to the lifting of the VAT exemptions of oil and petroleum products as well as previously-exempt services such as medical and legal services.

However, officials said the February adjustment in the EVAT rate is critical since it would significantly change the revenue base of the National Government.

After the Moody’s visit, Fitch Ratings Inc. is scheduled to conduct its ratings review in January, followed in April by Standard & Poor’s. Both agencies will be looking at the VAT adjustment as the final evidence of the Arroyo administration’s commitment to reducing its budget deficit and overall debt burden.

IRO executive director Rene Pizarro said initial feedbacks from the credit rating agencies all pointed to concerns that the VAT adjustments would be facing similar difficulties as the lifting of the VAT exemptions this year.

The exemptions were scheduled to be lifted in July but the revenue measure did not actually take effect until November because of opposition from consumer groups as well as the oil and petroleum industry.

Pizarro said credit rating agencies also expressed concern that the country’s economic buoyancy is not supported by economic fundamentals outside of huge inflows from overseas Filipino workers.

"They’re concerned about the sustainability of investments, they want to see that business is rooted and not fleeting," Pizarro said. "But what would ensure the sustainability of investments is conducive environment, beginning with sound fiscal policies."

He added that credit rating agencies want to see that the initial revenue flow from the lifting of VAT exemptions would be sustained over the long term by a real increase in revenue base from the increase in the VAT rate.

Moody’s, as well as other credit rating agencies, were alarmed by the country’s approaching debt crisis earlier this year but the adjustment in the VAT had signaled a commitment to improve the revenue base of the government to avoid future heavy borrowing.

Pizarro pointed out that when Moody’s downgraded the country’s ratings, its main concern has been the fiscal balance and the stalled implementation of the VAT reforms.

"Now we have implemented phase 1 of the VAT reform and by February there will be further adjustment in the rate from 10 percent to 12 percent," he said. "That will make the outlook upgrade feasible."

However, Pizarro said Moody’s is still particularly concerned about the government’s inability to complete the privatization of the National Power Corp. although the agency recognized the positive impact of the tariff adjustment on the company’s bottom line.

Pizarro said Moody’s has also been apprehensive over the disruptive impact of the proposed Charter change on the momentum of the economic reforms that have not been completed by the government.

"They are generally optimistic but their caveat there is that if there is charter change, it might disrupt the momentum of the economic reforms and distract Congress from the legislative measures that need to be passed," he said.