MANILA, Philippines - Fitch Ratings said yesterday the Philippines needs to grow its economy faster and attract more investments to receive the much-awaited investment grade rating from the global rating agency.
In a Forum and Investors Launch 2011, Fitch head of Asia Pacific Sovereigns Andrew Colquhoun said the Philippines needs to catch up with its peers in the ‘BB+’ or one notch below investment grade to be able to get a positive rating outlook that would the way for a possible rating upgrade to ‘BBB’ or investment grade rating.
“In terms of the rating outlook and what would be the key rating drivers going forward, I think that further positive rating outlook would be dependent on strctural reform to raise the economic growth rate which remains not much stronger than ‘BB’ range average despite the fact averaging much lower in the Philippines than in rated peers,” Colquhoun stressed.
He also added that structural reforms to raise the rate of investments growth, continued fiscal discipline, and management of public financing in such a way as to deliver fiscal sustainability is also crucial.
He warned that the main negative pressure on ratings would be fiscal slippage through the deterioration in the budget balance.
Fitch expects fiscal managers to trim the country’s budget deficit to about three percent of gross domestic product (GDP) this year from about 3.7 percent of GDP last year.
However, he pointed out that the level of revenues in the Philippines is low after its revenue effort fell to 14.2 percent of GDP last year from 16 percent of GDP in 2006 after the value added tax reform law was implemented.
He explained that the country’s revenue effort was way below the median of 26 percent in other ‘BB+’ rated countries.
Indonesia will likely reach investment grade status before the Philippines because its ratings outlook is already positive while the Philippines’ is stable, Colquhoun said.
“There’s stronger momentum behind the sovereign rating of Indonesia at the moment, explaining their positive outlook, largely on account of the stronger growth prospects in their economy,’’ Colquhoun said, projecting Indonesian growth of six percent to 6.5 percent per year in the next few years compared with 4.5 percent to five percent for the Philippines.
“The difference may not seem like much but it adds up over time and from a roughly similar starting point (in 2005), Indonesia has average incomes of about $3,000 a head now, the Philippines $2000 dollars. These sort of differences in economic performance add up over time.”
He added that there has been a slight improvement in tax revenues particularly from corporate and income tax receipts of the Bureau of Internal Revenue (BIR) that went up by 22 percent in the first five months of the year while the Bureau of Customs (BOC) performed below expectations.
“It is little too early to call a structural improvement in the Philippines ability to mobilize tax revenues. So far reflecting a balance between entry of revenues which is at very low level compared to the Philippines’ rating peers and expenditure control. Expenditure control is very tight in the first half of the year and expenditures are down year on year on cash terms but we don’t think that could be sustainable until the end of the year,” he said.
Furthermore, he pointed out that it would be difficult for the Philippines to increase its revenue collections by only relying on improving administrative and collection efficiencies and without the introduction of new tax measures.
“Experience globally with all the countries have been that delivering meaningful improvements in tax revenue rate purely through administrative performance and improvement in compliance, it is difficult to point to examples where that happened,” he lamented.
The Aquino administration has vowed to first focus on improving administrative and collection efficiencies before introducing new tax measures or increasing existing taxes.
“A higher or stronger fiscal revenue base would support Philippines’ sovereign credit profile as to whether that is done through administrative measures or through higher tax rates that is the question for the administration. Looking at experience around the world it is difficult to identify cases where administrative measures alone have driven some meaningful rise in fiscal revenue take,” Colquhoun explained.
According to him, it would be important for the Aquino government to avoid the temption of giving further tax breaks and giveaways as the decline in its revenue effort was due mainly to tax breaks such as senior citizens’ discounts as well as the reduction in tariffs based on compliance with the World Trade Organization (WTO) and other trade agreements.
The official from Fitch Ratings said it is important for the Philippines improve its investment level that stood at 16 percent of GDP compared to the 30 percent of GDP in Indonesia.
Likewise, he added that the Philippines needs to further improve its GDP growth that averaged 4.9 percent per annum over the last five years compared to Indonesia’s 5.7 percent.
This resulted in a higher per capita income for Indonesia with $3,000 per head compared to $2,000 per head for the Philippines.
Colquhoun said Fitch sees Indonesia’s economy growing between six percent and 6.5 percent this year and next year while the GDP growth of the Philippines would range from 4.5 perent to five percent.
The Cabinet-level Development Budget Coordination Committee (DBCC) sees the country’s GDP growing between seven percent and eight percent this year from 7.6 percent last year.
The country’s GDP growth slackened to 4.9 percent in the first quarter of the year from the revised 8.4 percent in the same quarter last year due to weak global trade and government underspending.