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NEWS UPDATES 5 August 2010

Philippine credit rating needs plan

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Standard Chartered Bank (SCB) says that to get a credit upgrade the new Philippine government needs a credible medium-term fiscal consolidation plan.

The resilience of the domestic economy amid the global recession, a smooth political transition following the May elections, and a comfortable level of external reserves and a structural current account surplus are positive developments that help build the case for an upgrade in the Philippines’ credit score.

SCB said the efforts by the Bangko Sentral ng Pilipinas (BSP) to strengthen its inflation-fighting credibility – including the recently announced 2012 to 2014 inflation target – and a more manageable fiscal debt that has declined steadily to 57 percent in 2009 from 78 percent in 2004 also were encouraging developments.

“However, a number of conditions still need to be met to set the stage for rating upgrade,” SCB cautioned.

“While we believe the government’s target of keeping the deficit at 2 percent of GDP (gross domestic product) in the medium term is manageable, further revenue-enhancing measures and convincing evidence of the administrative reform of tax agencies will be key to the rating agencies’ assessment,” the bank said.

The Aquino administration must also show further evidence of efficient execution of administrative reforms.

Given the lack of a dominant party under the Philippine political system, the reliance on the business community for election funding could make the passage of policies that might adversely affect interest groups more challenging, the bank said.

SBC said the Philippines also has to deepen and diversify the sources of domestic economic growth.

Although strengthening tax collection is a key requirement for a potential rating upgrade, SBC said the Philippines has an “urgent need for productivity-enhancing public investment to expand the economic base and create a more balanced economy—particularly in the face of increasing regional competition as ASEAN (Association of Southeast Asian Nations) plans to integrate into a single market and production base by 2015.

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