Government must address food price issue – Fitch

Fitch Ratings said there might be room in the budget for the Arroyo Administration to address rising food prices but concerns over sustainability of revenue flows should be addressed with similar urgency.

Fitch is in the Philippines to conduct its annual review of the country’s credit rating amid rising inflation and imminent fiscal slippage due to less-than-impressive revenue collections.

According to James McCormack, director of Asian sovereign ratings at Fitch, the agency had only begun looking into the implications of rising food prices on the country’s public finances.

McCormack said food subsidy issues would have to be defined to determine how they would be reflected in the national budget, adding that it could be a broader public finance issue.

McCormack said increasing public subsidy on rice and other food items, however, was largely a political rather than an economic question.

“There may be some room to do something in terms of addressing that issue because it is a legitimate social and political concern,” he said.

According to McCormack, Fitch expects the National Government to generate a budget deficit this year, although how big a deficit was still uncertain.

“That’s not necessarily good or bad, to be honest, because government debt ratios continue to decline and that is a bigger focus for us than a given year’s fiscal balance,” McCormack pointed out.

Overall, McCormack said the public finance dynamics are still broadly positive. “Once debt ratios continue to fall, you can’t be overcritical of public finance even if there’s a small deficit,” he said.

McCormack said a deficit of P100 billion might sound huge but was actually small when measured as a portion of gross domestic product (GDP).

According to McCormack, Fitch has given no indication of any changes in its ratings or its ratings outlook and this year’s review was to determine whether these still held.

“The issues we’ve been concerned about in the last couple of years are still there, primarily the revenue side of public finance,” he said. “Notwithstanding the good fiscal performance we’ve seen in recent years, there’s still some concern on sustainability of revenues right now,” McCormack added. “There will be probably some growth risks this year with weaker global environment, but still debt ratios are quite going down and external side is still quite strong.”

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 ratios and manageable budget deficit.

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 is likely to remain wide if unsustainable proceeds from privatization are excluded.

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