Fitch Ratings is not likely to change the country’s credit ratings in the near future, although the agency warned that weak tax revenue collections posed a serious outlook risk.
The London-based credit rating agency said over the weekend that the Philippines was in a “relatively stable ratings situation,” with the country’s declining debt ratio and manageable budget deficit.
James McCormack, head of Fitch’s Asia Sovereign Group, said however that the credit rating agency was worried about the long-term prospect of the government’s revenue base.
Although the Arroyo administration has succeeded at persuading Congress to increase the value-added tax rate from 10 percent to 12 percent, McCormack said collection efforts have not been able to deliver the expected revenues.
“We’re currently not in the position to say that ratings could go negative but the fly in the ointment is the fiscal side,” McCormack said.
For an economy that has been growing at six to seven percent, McCormack said revenue collection was weak and was not catching up with the growth momentum.
McCormack has already said that Fitch did not think that balancing the budget by 2008 was realistic and the fiscal gap was likely to remain wide if unsustainable proceeds from privatization were excluded.
Net of privatization, McCormack said Fitch estimated the 2008 budget deficit to be at least P100 billion.
Although Finance officials said they could bridge the revenue and spending gap using proceeds from the sale of its assets, credit rating agencies have been discounting these non-recurring revenues when assessing the country’s fiscal position.
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.
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 2007, particularly with respect to tax collection.