The Philippines has not progressed enough to warrant an investment grade credit rating, a debt watcher yesterday said, countering the government’s calls for an upgrade.
Indicators such as public debt, per capita income and gross domestic product (GDP) growth still need to be improved, said Andrew Colquhoun, Asia-Pacific Sovereigns head of Fitch Ratings, in a teleconference.
Indonesia — “a key regional comparison” — made significant strides in its macroeconomic fundamentals before it was raised to investment grade last December, Mr. Colquhoun said.
While the Philippines’ public debt had fallen to 50.9% of GDP as of 2011, the lowest in 13 years, the ratio was still double the 25% in Indonesia, the Fitch official noted.
Per capita income levels also differ widely between the two countries, he added, at only $2,223 last year for the Philippines compared to Indonesia’s $3,542.
“The country also has slower economic growth at about 4-4.5%, while Indonesia averages 6-6.5%,” Mr. Colquhoun said.
The Philippine economy grew by only 3.7% last year as exports, public spending and agricultural output fell.
Indonesia, meanwhile, boasted of 6.5% GDP growth — its best performance in 15 years — on the back of strong private consumption and investment.
The government expects the economy to grow by 5%-6% this year but Mr. Colquhoun projected the result would be the “lower end of the target range.”
“Given these factors, it’s reasonable that there’s a one-notch difference between the two countries,” he said.
Fitch currently rates Indonesia BBB-, one notch higher than the Philippines, which is ranked at BB+.
Economic managers have claimed that the country is underrated by as much as four notches, especially since the market already assigns investment grade interest rates on the government’s bond offerings.
“According to Fitch analytics and informal indicators, the markets rate the Philippines at BBB, two notches higher than its present rating,” Mr. Colquhoun admitted.
There could be other reasons behind this, he said. With flush liquidity conditions in the Asia-Pacific, markets grant interest rates lower than those typically secured by countries for their credit rating.
“Market ratings in the region do tend to bunch in that BBB range,” he pointed out.
Nevertheless, the Philippines is supported by credit strengths such as its stable public institutions and well-managed fiscal deficit, Mr. Colquhoun said.
“A weakness, though, is the exceptionally low revenue collection,” he noted.
Revenues accounted for only 14% of GDP in 2011. The government aims to bring this ratio up to 14.2% this year.
Higher excise taxes on “sin” products made of alcohol and tobacco would be a welcome development.
“‘Sin’ taxes have proven to be a dependable source of revenues in other countries. It is easy to collect and it makes economic sense,” Mr. Colquhoun said.
He added, however, that a more “broad-based impact” would be realized via the rationalization of fiscal incentives.
“If the Philippines is serious about increasing its revenue take, it should look at the fiscal incentives awarded to special economic zones. They exclude high-value economic activity from tax collections,” he explained.
Both the reform of the excise tax system and the rationalization of fiscal incentives are priority bills of the Aquino administration.
The “sin” tax bill is already up for plenary discussion at the House of Representatives, while the fiscal incentives bill is under deliberation at the Senate ways and means committee.
Cabinet officials have raised the possibility of an investment grade credit rating being secured this year.
Last week, however, Standard Chartered Bank said the country faced a longer wait.
“Economic development, institutional reform and investment take time to show results. We are mildly optimistic that the Philippines will be upgraded to investment grade around 2014,” it said.
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By Diane Claire J. Jiao
Source: BusinessWorld, May 15, 2012
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