Tax shortfall to affect RP rating - Citibank

MANILA, Philippines - Unless the government would be able to accelerate its collection pace, the country’s tax collection shortfalls could worsen in 2009 — a major threat to its credit ratings amid slowing growth.

Despite the developing problems over tax collection, however, banking giant Citi said the country’s debt ratios require the least effort to stabilize compared with its neighbors in the region.

Looking at varying levels of fiscal sustainability in the region, Citi said in a report that among other emerging economies in East Asia, the Philippines only had to worry about its vulnerability to swings in its local currency.

Citi observed that in the Philippines, tax collection by the Bureau of Internal Revenue (BIR) which accounts for about two-thirds of total revenues, fell short of target by P2 billion (1.9 percent) during the first two months of this year.

On the other hand, the Bureau of Customs which accounted for 22 percent of total revenues, fell short by P3 billion or 9.6 percent of target in the same two-month period.

Citi said BIR tax collection was down 4.6 percent year-on-year. With quarterly tax collection growth being the slowest in the first quarter of the year, the bank said collection shortfalls could worsen in the coming quarters if the pace of collection growth fails to improve significantly.

The impact of tax collection on the budget and the possible increase in borrowing requirements could put the country on a vicious cycle of even lower tax collection and higher debt.

But Citi said debt sustainability has historically not been a very big issue in Asia where a period of strong growth, low real interest rates and predominantly prudent fiscal policies resulted in almost uniform decline in government debt-to-GDP ratios since the large spike post-Asian crisis.

“Government deficits per se are not bad, as long as they can deliver growth that would place the ratio of public debt –to-GDP on a sustainable path, i.e. does not end in a never-ending upward spiral,” Citi said.

Citi observed that public external debt in Pakistan, Sri Lanka and Indonesia was still dominated by multilateral/bilateral sources, though in Indonesia’s case, the component of commercial debt was rising to about 18 percent of total public external debt.

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