Moody’s cites need for Phl to pursue fiscal reforms

MANILA, Philippines – New York-based Moody’s Investors Service said the Philippines needs a more sustained improvement of credit fundamentals such as structural improvements in revenue generation requiring significant fiscal reform to get another credit rating upgrade.

In a report, Moody’s said the country needs a more sustained improvement in its credit fundamentals after its credit rating outlook was upgraded to ‘Ba2’ or two notches below investment grade last June 15 from ‘Ba3’ or three notches below investment grade.

“In addition, as the Philippines” sovereign rating now sits atop its methodological range at Ba2, further upward rating movement will therefore require a more sustained improvement of credit fundamentals,” the credit rating agency stressed.

For one, Moody’s said the Philippines needs significant fiscal reform as part of structural improvements in revenue generation despite major improvements in the country’s fiscal position under President Aquino.

The report pointed out that the Aquino government has “righted the fiscal ship” in its first 11 months in office without the benefit of fiscal reform but by focusing on enhancing efficiency within the fiscal framework inherited from the administration of former President and now Pampanga Rep. Gloria Macapagal Arroyo.

“By proving to the body politic that it can achieve substantial gains on a platform of good governance, this administration has made a credible case to go further, such as, pursuing actual fiscal reforms,” Moody’s said.

It cited pending legislative bills such as the rationalization of fiscal incentives given to investors and a re-indexation of sin taxes on products such as alcohol and cigarettes.

The country’s budget deficit improved 94.1 percent to P9.54 billion in the first five months of the year from P162.12 billion in the same period last year. Revenues increased 16.3 percent to P581.5 billion from P500 billion while government expenditures fell 10.73 percent to P591.04 billion from P662.12 billion.

The tax take of the Bureau of Internal Revenue (BIR) rose 13.66 percent to P391.09 billion from P344.1 billion while collections of the Bureau of Customs (BOC) declined slightly to P106.89 billion from P107.47 billion.

“The government’s revenue performance continues to lag that of its rating peers – revenues as a share of gross domestic product for the Ba-median averaged 23.7 percent from 2006-10, while that of the Philippines was only 14.7 percent,” the rating agency added.

It explained that the country’s revenue growth has failed to keep pace with either nominal GDP growth since 2008.

“It is unlikely that stricter tax compliance will generate a material change in revenue performance if tax evasion cases are not resolved expeditiously by the country’s inefficient legal system,” Moody’s said.

Moody’s upgraded the country’s credit rating outlook to positive from stable last January that paved the way for the rating upgrade to two notches below investment grade from three notches below investment grade last June 15 in recognition of the country’s progress on fiscal consolidation.

“The sovereign rating upgrade was not based solely on fiscal performance year-to-date, but a demonstrated commitment to restore fiscal credibility since the Aquino administration assumed office in July 2010,” Moody’s said.

In its latest assessment of the Philippines, Moody’s evaluates four factors on a scale which includes “very high,” “high,” “moderate,” “low,” and “very low.”

For economic strength, it assesses the country as “low”; for institutional strength “moderate”: for government financial strength “low”; and susceptibility to event risk “low.”

Moody’s sees the country’s GDP expanding between five percent and six percent this year and next year or lower than the seven percent to eight percent target set by the Cabinet-level Development Budget Coordination Committee (DBCC) despite the tensions in the Middle East and North African (MENA) states as well as the disasters in Japan. –Lawrence Agcaoili (The Philippine Star)