S&P, Moody's cite need for fiscal consolidation

MANILA, Philippines - International credit raters Standard & Poor’s and Moody’s Investors Service stressed the need for the administration of President Aquino to steer the Philippines back on the fiscal consolidation path to achieve an upgrade in the country’s credit rating outlook and sovereign credit rating.

S&P associate director for sovereign ratings Agost Benard said in a statement that the Aquino government should focus on fiscal consolidation and improving the revenue collections of the Bureau of Internal Revenue (BIR) and the Bureau of Customs (BOC).

“We could revise the outlook on the sovereign credit rating to positive on evidence of a renewed focus on fiscal consolidation and revenue improvement as economic conditions stabilize,” Benard stressed.

He pointed out that the impact of the global economic meltdown derailed the fiscal consolidation plan of the Philippines wherein it committed to achieve a balanced budget this year under the Medium Term Philippine Development Plan (MTPDP).

The administration of former President Arroyo adopted a series of fiscal reform measures aimed at accelerating the achievement of a balanced budget to 2008 but was abandoned including the original 2010 target under the MTPDP due to the financial crisis that started in the US.

The reforms helped trim the budget deficit to P12.4 billion or 0.1 percent of gross domestic product (GDP) in 2007 but the global financial crisis widened the shortfall to P68.1 billion or 1.1 percent of GDP in 2008 and to a record level of P298.5 billion or 3.9 percent of GDP last year.

This year, the Philippines is staring at a record level deficit of P325 billion or 3.9 percent of GDP. The Aquino administration has committed to gradually trim the shortfall until it reaches two percent of GDP by 2013.

Benard said the stronger-than-expected economic growth would play a crucial role in helping reduce the country’s swelling budget deficit.

“The Philippines’ steady growth is likely to provide a solid basis for further debt reduction as fiscal consolidation resumes. Efforts to counter the effects of the global economic slowdown halted consolidation last year,” he added.

He explained that the total debt of the Philippines stood at 56 percent of GDP in 2009 or well above the median 40 percent for sovereigns in the ‘BB’ rating category.

“This is attributable to the Philippines’ low revenue base and indicates a higher level of vulnerability compared with similarly rated countries.

The government’s still significant, albeit declining, external debt also constrain the ratings. The country’s foreign debt remained relatively high in 2009 at 43.8 percent of overall public external debt. This highlights the vulnerability of its fiscal profile to adverse external developments,” he said.