PHL needs to pursue fiscal reforms – Moody's

The Philippines needs to advance its credit fundamentals that include structural improvements in revenue generation to receive another rating upgrade, according to Moody's Investors Service. Such undertaking involves significant fiscal reform, the New York-based credit rating agency said in its latest report — "Credit Analysis: Philippines." Moody's said the Philippines must have a more sustained improvement in credit fundamentals after it got on June 15 an upgrade in its credit rating outlook to 'Ba2' or two notches below investment grade from 'Ba3.' “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," it said. The administration of President Benigno Aquino III has "righted the fiscal ship" in its first 11 months in office by focusing on enhancing efficiency within the fiscal framework inherited from the administration of former President and now Pampanga Rep. Gloria Macapagal-Arroyo, Moody’s said. This was done without the benefit of fiscal reform, Moody’s added. "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," the credit rating firm explained.. It cited legislative bills — the rationalization of fiscal incentives given to investors and a re-indexation of sin taxes on products such as alcohol and cigarettes — that are still pending before the Senate and the House of Representatives. The Philippine fiscal deficit improved by 94.1 percent to P9.54 billion in the first five months of the year from P162.12 billion a year earlier. Revenues increased by 16.3 percent to P581.5 billion from P500 billion and expenditures fell 10.73 percent to P591.04 billion from P662.12 billion. The tax take of the Bureau of Internal Revenue also rose 13.66 percent to P391.09 billion from P344.1 billion and collections of the Bureau of Customs declined a bit to P106.89 billion from P107.47 billion. Importance of revenue reform The progress in revenue reform is important to further improve the rating trajectory, Moody's said. "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," Moody’s added. 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, paving the way for a rating upgrade to two notches below investment grade. "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 assessment of the Philippines, Moody's evaluates four factors on a scale of "very high," "high," "moderate," "low," and "very low." In economic strength, the rating agency assesses the country as low, moderate for institutional strength, low for government financial strength, and low for susceptibility to event risk. Moody's sees Philippine output in GDP terms expanding between 5 percent and 6 percent this year and next year, or lower than the 7 percent to 8 percent target set by the Cabinet-level Development Budget Coordination Committee. The country's GDP slowed down to 4.9 percent in the first quarter of the year from the revised 8.4 percent last year due to the weak global trade and government underspending. — VS, GMA News