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NEWS UPDATES Asean Affairs              20  July 2011

Philippines upgrade depends on reforms

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Fitch Ratings on Tuesday said the Philippines upgrade hinges on structural reforms to accelerate economic growth and continue fiscal discipline that are “not much stronger in the country” compared with its BB range peers. In a briefing, Andrew Colquhoun, head of Fitch Asia-Pacific sovereign, said the stable outlook for Manila indicates that the pressures on the ratings—whether upward or downward —are broadly balanced over the next 12 to 18 months.

Structural reforms to improve the investment climate will lead to a higher growth rate and more development, he said.

“Fiscal reforms that raise the fiscal revenue take and strengthen the public finances would be the key things that we see that could put an upward pressure on the rating, although the stable outlook suggests that we don’t see that coming to bear over the next 12 to 18 months,” Colquhoun told reporters.

“On the downside [is the] risk of fiscal slippage, as we have seen in the previous years, wherein the deficit has widened. Although I think it is fair to say that we don’t see that as a key risk. And certainly on the political side, support prospects for fiscal consolidation as the administration is only one year of its six-year term so political pressures are unlikely to drive fiscal policy over the medium term,” he said.

To improve the credit fundamentals of the Philippines, a faster rate of economic growth supported by higher investments driving more development and higher average incomes would be positive, Colquhoun said.

“A higher or stronger fiscal revenue base would support Manila’s sovereign credit profile. However, as to whether this is done through administrative measures or through higher tax rates that is the question for the administration,” he said.

“If we look at the experience of other countries, significantly increasing tax revenue take in an economy purely through administrative compliance measure is difficult to do. It is very difficult to identify cases where countries have made substantial improvement just through this way. Nonetheless there are improvement in compliance . . . there has been considerable progress that must be made in that sphere,” the Fitch official said.

He noted that the tax effort has gone down from 16 percent in 2006 to 14.2 percent in 2010 owing to tax breaks, senior citizen discounts, among other measures that eroded the revenue base.

“Avoiding the temptation to give further tax breaks and giveaways would also be something that we tend to support,” Colquhoun said.

Last month, Fitch lifted Manila’s credit score to “BB+” from “BB” on the back of the country’s strong external finances and the government’s efforts to trim its fiscal deficit.

The long-term local currency rating received an investment grade of “BBB-” from “BB+.”


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