RP fiscal gap may hit P100B – Fitch

Alarmed over the country’s weak revenue collections, London-based Fitch Ratings said that balancing the budget is not realistic in 2008 and the fiscal gap could even widen to P100 billion despite the expected surge in gross domestic product (GDP) growth this year and next year.

Fitch Ratings said that the country’s fiscal gap is likely to remain wide if unsustainable proceeds from privatization are excluded.

Fitch Ratings is projecting the economy to grow by seven percent this year but the momentum will decelerate to six percent in 2008 due to the anticipated slowdown in its major trading partners.

Fitch Ratings senior economist James McCormack told reporters yesterday that the country’s economic outlook is good if not for disappointing fiscal performance, particularly tax revenue collections.

McCormack said the gross domestic product (GDP) would grow by seven percent this year, with the economy sustaining its first semester performance all through the second semester and possibly through the first half of 2008.

According to McCormack, sustained remittances from overseas Filipinos would continue to feed domestic consumption and capital inflows into the equities market would also remain robust.

“We are not worried about capital inflows and there are lots of good news,” McCormack said.

However, McCormack said the biggest concern was the revenue performance of the Arroyo administration which has consistently lagged behind target.

“The fiscal performance is a great cause for concern,” he said. “At this point we don’t think a balanced budget is realistic.”

Net of privatization, McCormack said Fitch estimated the 2008 budget deficit to be at least P100 billion.

Credit rating agencies have expressed growing disappointment over the government’s revenue performance following its successful effort to raise the value added tax rate from 10 percent to 12 percent.

Although finance officials insist they could bridge the fiscal gap by selling off public assets to generate revenues, Fitch and other credit rating agencies have discounted these revenues since they were non-recurring proceeds that do not affect the public sector’s underlying revenue base.

According to McCormack, the Philippines still had the lowest tax revenue to GDP ratio despite some improvements made in revenue collections.

McCormack said the Arroyo administration had improved its finances by controlling expenditure and streamlining its debt portfolio to reduce debt service costs.

However, McCormack said not enough had been done to increase revenue which had consistently lagged behind official targets even with the increase in the value added tax rate.

Beyond short-term fiscal numbers, however, Fitch noted that there were bigger macro-economic issues that raised worries over the country’s medium-term prospects.

McCormack said the Philippines had the lowest investment to gross domestic product ratio among Asian countries where the average was close to 20 percent.

In contrast, the country’s investment to GDP ratio was around 14 percent which indicated that the growth momentum would be difficult to sustain over the medium to long term.

After looking at the country’s fiscal performance thus far, Fitch had revised its 2007 deficit forecast to P125 billion, excluding non-recurring revenues from privatization. This was equivalent to 1.9 percent of GDP.

According to Fitch, the positive momentum behind Philippine fiscal performance in recent years faltered badly in early 2007, particularly with respect to tax collection.