Need for reforms highlighted

Q2 upturn welcomed; Moody’s raises RP growth forecast

BETTER-THAN-EXPECTED second- quarter growth may have boosted the Philippines’ prospects but fiscal and reform issues remain a concern, debt watchers and an international bank said.

Following last week’s announcement of a 7.9% April-June upturn, Moody’s Investors Service said it had raised its 2010 growth outlook for the country. Fitch Ratings, meanwhile, said it was in the process of reviewing its own forecasts.

They did not indicate whether the growth result would affect the country’s credit ratings, although Moody’s called it “a positive credit development.” Fitch currently rates Philippine debt as ‘BB’ Stable while Moody’s scores it ‘Ba3’. Both are below investment grade.

The country’s rebound from last year’s downturn, said Deutsche Bank, presented “a golden opportunity” to push through with reforms that would require a “clear improvement in governance.”

Moody’s analyst Christian de Guzman, in an e-mail to BusinessWorld, said: “Following the unexpectedly robust Q2 GDP (gross domestic product) growth outturn, we have revised our 2010 forecast upwards from 5.7% to 6.5%.”

The forecast is higher than the government’s 5.0-6.0% target for 2010.

Fitch’s Asia Pacific Sovereigns director Andrew Colquhoun, in a separate e-mail, said: “We’re in the course of updating our economic forecasts. Broadly speaking, solid remittance inflows are supporting domestic demand while the recovery in global economy supports foreign trade, including, crucially for the Philippines, services exports (BPO).”

But while both lauded the second-quarter growth, which followed a 7.8% rise in the prior three months, they noted that revenues remained a concern.

“Government revenues in the Philippines are one of the lowest, relative to GDP, of any countries we rate,” Mr. Colquhoun said.

“There are problems of tax evasion, but the low taxes levied in the economic zones mean some of the most value-adding activity in the Philippine economy largely escapes the tax net,” he said further.

Mr. de Guzman shared the view, saying revenues are mainly dependent on income and value-added tax (VAT) collections.

“Philippine general government revenue as a share of GDP is lower than similarly rated neighbors such as Indonesia and Vietnam, as well as rating peers in other regions such as Jordan, Montenegro, and Panama,” he said.

“[R]evenue seem to be highly reliant on income taxes and VAT, both of which typically decrease during downturns as incomes and private expenditures fall.”

The government expects to incur a record P325-billion budget deficit this year, equivalent to 3.9% of GDP. The shortfall was at P229.4 billion as of July.

Moody’s, said Mr. de Guzman, expects the deficit to reach 3.8% of GDP this year.

“Despite the disappointing fiscal results in the past few months, we have kept our deficit projection steady in light of the more positive growth outcome.”

Mr. Colquhoun, for his part, said Fitch was keeping its 4% of GDP deficit forecast.

“[The] current fiscal performance is on trend to meet that forecast,” he said.

Deutsche Bank, in an August 27 research note, noted the Aquino administration’s determination to address fiscal problems. Still, it said “the road ahead will be challenging.”

“Whether the president manages to convince the legislature to pass and implement growth-critical reforms will be a key test.”

The government’s fiscal program, with its emphasis on tax administration, was described as “ambitious.” It said the plan would be feasible if it were “complemented by some tax policy efforts.”

Domestic growth, meanwhile, is expected to continue to be driven by private consumption as well as exports and remittances.

“Private consumption will continue to play a very important role in driving growth, aided by the continued rebound in the export sector and still-healthy remittance inflows,” Mr. de Guzman said.

Merchandise exports were up 37.7% to $23.71 billion in the first half while money sent home by migrant Filipinos reached $9.1 billion during the same period, 6.9% higher.

“While the risk of a double dip in the US and other advanced economies seem to be rising, a rising share of remittances is coming from within Asia,” Mr. de Guzman said.

He said favorable investor sentiment towards the new administration could also help.

Mr. Colquhoun said that while a weaker global economy was the main downside risk for the Philippines, growth next year is expected to still be supported by strong government investment and remittances.

The one risk to growth, said Deutsche Bank, comes from exports. — from reports by L. D. Desiderio and J. B. F. Santos, Businessworld