Fitch finds RP gains ‘impressive’

Fitch Ratings said the fiscal consolidation of the Arroyo administration was "impressive" but expressed concern over the sustainability of reforms over the medium term.

"Just taking a look at what we’re seeing in terms of the numbers, particularly the fiscal performance and the external side, we’re quite impressed with what’s going on right now," said Fitch senior analyst James McCormack.

However, McCormack was quick to point out that the job was far from done, with more reforms still pending. "What we’re concerned about is something we’re looking at last year, that is the sustainability in the medium term," McCormack said. "That’s a critical issue for us particularly fiscal performance more than anything else."

McCormack echoed the position of the International Monetary Fund (IMF) which has been pressing the government not to lose its momentum in pushing for legislative reforms that would tighten its revenue flow and ensure that there would be no fiscal slippage along the way.

"These are valid concerns," said Francis Varela, president of AB Capital Securities Inc. the value-added tax increase resulted in "to a large extent a one-time improvement" and "the concern comes from, as you free up on spending while revenue reverts to its normal growth track, the sustainability of the reduction in the deficit."

After the increase in tax rates, the Arroyo administration was expected to push Congress to rationalize its investment incentives to remove loopholes and take away fiscal subsidies from industries that have not been performing well.

According to McCormack, there was still a need to generate more revenues while ensuring the steady and secure flow of revenues from reforms that have already been put in place.

"We’re looking at medium-term sustainability. So, we’ll see if this will be sustained or there will be slippage either with the elections or more on the medium term when some spending pressures come back on social and infrastructure spending," McCormack said. "Will the revenues be there to finance this? That’s still an issue."

McCormack pointed out that there was still a need to increase revenues over and above the levels achieved by the increase in the value-added tax rate from 10 percent to 12 percent. He said the proportion of revenues to gross domestic product was a "relative rating weakness in the medium-term perspective."

"That’s one of the issues that should be addressed," McCormack said.

However, McCormack stressed that Fitch did not have a "preconceived notion" of where the country’s credit rating was headed after the outlook was upgraded from "negative" to "stable."

"It’s just the beginning of the process (of the review) so it’s difficult to conclude on anything," he said. "When we look at it, we look at it with a clean piece of paper so we don’t come up with preconceived notion about where the rating will go."

McCormack however pointed out that the country’s credit standing was being helped by its strong external sector which had brought the international reserves to a record high and kept the balance of payments at strong levels all through the year.

"The external side is clearly a rating strength, particularly the balance of payment performance and the current account side," he said.

McCormack added that the fiscal consolidation has brought down the country’s debt ratios "quite sharply," a development that all credit ratings agencies have been waiting for.

Over the medium term, McCormack said the accomplishments from these fiscal reforms needed to be translated into measurable improvements in funding for social services and infrastructure projects.

Fitch rates Philippine debt BB, two levels below investment grade. Standard & Poor’s rates it three levels below investment grade and Moody’s Investors Service four levels below.

McCormack, who’s meeting government officials, said Fitch will issue a report at the end of February.