DBS says Phl fiscal reforms still needed

MANILA, Philippines - Singapore-based DBS Bank said the country needs to continue improving its fiscal regime and putting in place reforms to further spur economic activities following the recent investment grade rating it received.

“Looking forward, further improvement in fiscal management is important for the credit rating outlook. So is further liberalization as the government aims to continue boosting the domestic economy,” DBS said in a recent report.

“The current plan is to increase foreign direct investment, which was relatively small at $2 billion in 2012. That the economy remains somewhat dependent on overseas workers remittances is clear. OFW remittances reached $21.4 billion in 2012, making up almost 10 percent of the economy,” DBS continued.

DBS said that the positive outlook given on the country’s new investment grade rating from Moody’s Investors Service was a “pleasant surprise” as the rating upgrade was already somewhat expected.

“Moody’s raised Philippine sovereign credit rating to Baa3 with a positive outlook. This was largely expected following similar upgrades by S&P and Fitch earlier this year. The positive outlook is quite a pleasant surprise, however, and it explained why the markets cheered the move on Thursday,” DBS recounted.

The positive outlook means another upgrade maybe in the horizon in the next 18 to 24 months.

DBS said the Philippine economy could easily grow by seven percent this year, in line with the bank’s expectations.

“For now though, it is easy to see that the economy is in a sweet spot. GDP (gross domestic product) growth dynamics remain solid and we continue to see upside risks to our current seven percent forecast for 2013,” DBS said.

The economy has already expanded by 7.6 percent in the first half, faster than the government’s 6-7 percent growth target for the year.

The first semester performance is also among the fastest in the region during the same period.

“Tax revenue collection is likely to remain supportive and would sustain the primary budget surplus for the medium-term. In turn, this allows an accommodative fiscal policy to remain prevalent for now,” DBS noted. 

It added inflation continued to be benign and would likely be within the central bank’s target of 3-5 percent this year.

DBS also expects the Bangko Sentral ng Pilipinas (BSP) to keep policy rates steady this year so as to avoid overheating the economy.

“Recent comments from the BSP indicate that the rate hikes are in the offing next year, even if rates are likely to remain stable for now,” DBS said.

Overnight borrowing and lending rates are at 3.5 percent and 5.5 percent, respectively, since the start of the year. The BSP earlier said the robust economic growth coupled with a manageable inflation has allowed the central bank to keep rates steady.

Policy rates would be revisited on Oct. 24.