Finance Secretary Cesar Purisima believes the Philippines is still a notch underrated even after the recent rating upgrade to Baa2 by Moody’s Investors Service.
Purisima said the upgrade reaffirms the country’s strong economic fundamentals as well as the reforms in the government. “Good governance is indeed good economics,” is Purisima’s mantra.
He claimed that the Philippines is still a notch underrated. He said a comprehensive and equitable tax reform at par with Asean [Association of Southeast Asian Nations] peers, enhancements in tax administration, the expansion of the Treasury Single Account, and the passage of customs modernization act, and transparent fiscal incentives will help the Philippines get a better rating in the next credit review.
Private analysts, meanwhile said the government must sustain the reform momentum specially in the budget process to be able to maintain the country’s current investment grade rating.
Purisima said reforms in the revenue agencies has brought the Philippines ever closer to its goal of reaching 16.6 percent tax-to-gross domestic product (GDP) ratio, as the ratio has now improved to 14.08 percent for the first three quarters of 2014.
Notably, the credit rating upgrade affirms the positive effects of the government’s daring program to reform the Bureau of Customs, he said, adding that the bureau is fast becoming one of the country’s best reform stories as it continues to post double-digit growth in collections.
Meanwhile, the Finance chief noted that the country’s debt burden now stands at 37.3 percent of GDP as of end-June, a full 6 percentage point (ppt) improvement from the 44.3 percent figure posted in 2010, and a staggering 30.8 ppt decrease from the peak recorded at 68.1 percent in 2003.
For its part, the Department of Budget and Management said the Moody’s upgrade can definitely be viewed as an endorsement of the fiscal management and reform policies initiated by the government.
“The Moody’s report draws a sure connection between the country’s robust economic base and the Administration’s efforts in promoting good governance. This is especially in light of the Philippines’ continued improvement in cross-country surveys on institutional quality,” said Budget and Management Secretary Florencio Abad.
Abad said that the government will take the ratings upgrade as a sign to push the budgetary reforms further, like the General Appropriations Act-as-release-document regime, the disaggregation of lump sums in the National Budget, and the Transparency Seal.
“We’re also addressing bottlenecks in the procurement process, like the creation of new positions under the Bids and Awards Committees in key departments to boost government spending,” he said.
The budget chief also noted that these parallel efforts are due to the government’s on-going commitment to ramp up the country’s economic growth through efficient public spending, improved governance, and key policy reforms.
“Thus while markets are expected to continue reacting positively to the upgrade decision in the near term, we are genuinely concerned that ratings could deteriorate if complacency leads to a slowdown in the reform momentum,” Emilio Neri Jr., lead economist at the Bank of the Philippine Islands, said.
Neri believes that higher ratings will be reversed if the national government (NG) fails to deliver on commitments to de-clog bottlenecks in government spending programs, or to process/decide on public-private partnership applications and biddings more efficiently.
“The strong fiscal position of the NG could deteriorate if revenue collections are eroded by the failure of NG spending to keep pace with the demands of a growing economy for better logistics and infrastructure,” he said.
Patrick Ella, economist at Security Bank Corp., lauded Moody’s when it cited the Supreme Court ruling on fiscal spending measures, such the Disbursement Acceleration Program (DAP) and the pork barrel, as one key factor in its credit-rating decision.
“This should be a positive reinforcing argument for more fiscal transparency going forward. This also serves to discourage any policy rollback on DAP and pork barrel activities for succeeding administrations and politicians,” he said.
On the other hand, Singaporean bank DBS noted the bigger challenge for the country is to ensure sustainable growth in the longer-term.
“On the fiscal front, this will entail further infrastructure and capacity build-up in the economy, particularly given that income level remains low. On the monetary front, further normalization of policy is probably still warranted in 2015, even if overheating risks have somewhat eased in recent quarters,” the bank stated.