Following a visit to the country in end-February, Merrill Lynch said it is expecting the country’s economic growth to reach at least 5.8 percent this year and over six percent in 2008, driven mainly by private consumption and exports.
According to the world’s biggest financial manager, recent developments in the macro-economy would bode well for the country’s overall credit standing.
Merrill Lynch said it believed that the Philippines’ rating outlook might be raised from "stable" to "positive," putting the country on track for a possible and subsequent upgrade in its credit ratings.
According to Merrill Lynch, the upgrade in the country’s ratings outlook would depend on the conduct of the May elections and whether it would remove lingering uncertainty over the political transition.
Should the election process turn out smoothly and clear signs are present that the economic reform program would be sustained, Merrill Lynch said the upgrade in outlook would be followed by a credit rating upgrade in 2008.
For starters, Merrill Lynch said the country’s inflation outlook was stable and it did not foresee any significant loosening of monetary policy in the near future, even in the run-up towards the May election.
Merril Lynch said in its report that the May election is likely to keep the country’s political outlook benign although it expressed concern over the revenue performance of the Bureau of Internal Revenue (BIR).
Merrill Lynch has reaffirmed its overweight recommendation on Philippine debt saying that despite the noise related to the May elections, the exercise would have a limited impact on the macro-economy.
According to Benoit Anne, Merrill Lynch’s vice president for emerging markets research, growth is likely to be "healthy" in the near term, driven by consumption and exports.
On the supply side, Anne said the boom in the services sector would also provide the main impetus for economic activityâ€â€Âcreating more jobs and increasing the purchasing ability of consumers.
Despite the progress in fiscal consolidation, however, Anne said the sustainability of the fiscal strategy over the medium term should become the focus.
"We do not think that there is a major risk of slippage on the expenditure front," said Anne.
However, Anne pointed out that while the elections are not likely to raise any major issue, the main focus would be on the tax revenue performance of the BIR.
Anne said the BIR would be the significant factor in the success or failure of the government’s fiscal strategy over the medium term since the bulk of the revenue flow would come from taxes collected by the agency.
"We recognize that the potential for raising BIR revenue collection is substantial," Anne said. "But we think that it may only materialize after a few years of sustained effort."
Moreover, Anne said the quality of fiscal adjustment was a major issue in fiscal consolidation. He echoed the sentiments of the country’s major donors who said the tax reform program was far from complete and further reforms would be necessary to sustain the current momentum.
"While we believe the government would strive to meet its fiscal objectives, there is a need to address medium-term challenges related to accelerating the pace of spending and growth of investments," he said.
On the whole, however, Anne said the macro-economy is expected to remain steady, especially inflation.
"We do not foresee any inflationary impact of the election process."
Anne also said Merrill Lynch did not see any vulnerability in the external sector given the steady inflow of remittances from overseas Filipino workers as well as investment.