THE Philippines may have achieved notable fiscal and monetary improvements these past months, but it’s not yet time for a credit-rating upgrade, Fitch Ratings said on Tuesday.
In fact, Indonesia is likely to win an upgrade for its sovereign credit rating to investment grade before the Philippines, the UK-based rater said. Fitch rates both countries at BB+ or one step below investment grade.
According to Andrew Colquhoun, Fitch’s head for Asia and the Pacific, structural reforms that have yet to happen would drive the change in the sovereign credit standing of the Philippines.
“I think a positive rating outlook would be dependent on structural reforms to raise the economic growth rate, which remains not much stronger than a BB range average,” Colquhoun said.
Philippine regulators and some analysts believe the country is ripe for an investment upgrade to BBB under the Fitch classification of sovereign borrowers, especially since the markets have awarded the Philippines a
de facto upgrade via thinner interest spreads on its borrowings.
But Colquhoun noted that the Philippines ranks slower than similarly rated peers in the region like Indonesia.
He pointed out that while the Philippine economy is certainly very liquid in both foreign and local currency terms, its ability to provide for the future by investing in public infrastructure, for instance, has been rather tame compared with its neighbors.
“The amount of investments in this economy remains relatively low compared to its rated peers,” Colquhoun said.
He noted the Philippines has an investment rate equal to only 16 percent of local output or gross domestic product (GDP)—or nearly half that of Indonesia’s investment rate of 30 percent of GDP.
He also said Indonesia had been growing at the rate of 5 percent a year in the last five years, while the Philippines only managed to grow at a rate of 4.9 percent. While the difference may not be that much, he noted that Indonesia has a higher per-capita income of $3,000, or $1,000 more than the Philippines.
Indonesia has a “more than 50-percent chance” of an upgrade in the next 12 to 18 months, he added.
According to Colquhoun, structural reforms that would boost tax revenues should help lift investment activities and thus ensure long-term growth.
For Fitch, “fiscal slippage” through a deterioration in the fiscal balance remains “the main negative pressure” on the long-sought credit upgrade.
Colquhoun, however, credited the work done in recent years by fiscal and monetary authorities that has allowed the Philippines to attain a level of sustainability in growth and having effectively managed price pressures that had conquered some of its peers.
He stressed the stable outlook attached to the country’s BB rating indicated the likelihood of both an upward or even a downward rating adjustment.
“The stable outlook indicates that we see pressure on the rating upward and downward as broadly balanced over the next 12 to 18 months. Upward structural reforms improving the investment climate leading to higher growth rate and more development, fiscal reforms that raise the fiscal revenue take and strengthen public finances are the key things that could put an upward pressure on the rating,” Colquhoun said.
President Aquino has gone after tax evaders and corrupt officials to narrow the budget deficit from a record P314.5 billion in 2010. The government has, so far, resisted imposing new taxes, in keeping with a campaign promise.
Internal Revenue Commissioner Kim Henares reiterated on Tuesday that the government could continue generating revenue without having to impose new taxes. “There’s a lot of uncollected taxes out there,” Henares said. “We’ve not plugged all the loopholes.”
The government aims to improve tax collection by 0.3 percent annually and could collect taxes equivalent to 4 percent of gross domestic product from small- and medium-sized companies, Henares said.
(With Bloomberg News)
