MANILA, Philippines – The Philippines needs to expand its tax base and increase tax rates to significantly boost revenues and cut debt levels if it wants to win an investment-grade sovereign rating, Standard & Poor’s Ratings Services said on Friday.
While the country has shown commitment to achieving fiscal consolidation, S&P credit analyst Agost Benard said more steps were needed to improve its ability to generate and capture revenues and reduce reliance on expensive debt.
“They are on the right track and things are progressing in the right direction, but I think a fundamental and sustained revenue-generation improvement is one of the hallmarks of investment-grade countries,” Benard told Reuters in an interview.
“Countries in investment grade don’t have revenues at 16% of GDP where they have to scrimp on infrastructure spending,” Benard said.
Last November, S&P raised the Philippines’ foreign currency credit rating to BB, two notches below investment grade.
Moody’s Investor services has an equivalent rating, having upgraded the country last week, while Fitch Rating on Thursday upgraded its rating to one notch below investment grade, putting the Philippines on par with Indonesia.
The government, which took office a year ago, projects revenues will be 15.1% of GDP this year, up from 14.2% of GDP last year. Revenues are projected to rise to 16% of GDP in 2014 and 16.6% by 2016.
Its revenue-to-GDP ratio is the lowest among the five leading Southeast Asian economies, Asian Development Bank data shows.
While the government is cutting the budget deficit — it fell to 3.7% of GDP in 2010 from 3.9% in 2009, and is projected to fall to 3.2% this year, weak revenues constrain its ability to fund infrastructure and social spending.
Benard expects the deficit to come in below the government’s 2011 target, although did not give a specific forecast.
The government is hoping to free up funds by tapping private investors as partners on infrastructure projects, but the ambitious scheme is taking longer than expected to get underway.
It is also looking to boost revenues by enforcing existing tax laws and cutting corruption. Benard said this push needed to be supported by revenue-improving measures.
“This has been a long-standing problem in the Philippines, the very constrained revenue-generation capacity. And there are two aspects to that problem; the weakness of revenue administration and the other is revenue base itself,” he said.
“Maybe by next year or the year after that will be augmented by addressing the other aspect of expanding the base, taxing all different constituents which have so far been outside of the tax map,” Benard said.
“Those measures will come in due course and that will further cement fiscal consolidation,” he said.
Finance Secretary Cesar Purisima said the government wants to achieve an investment-grade rating within the first half its six-year term, which would help lower government borrowing costs and widen its potential investor base. –Karen Lema, Reuters
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