Fitch warns Marcos: Amending Rice Tariffication Law may trigger rating downgrade

MANILA, Philippines — Ferdinand Marcos Jr., presumptive president-elect, must tread carefully if he would push to amend the Rice Tariffication Law (RTL) as part of his promise to bring down the prices of the staple grain, Fitch Ratings said Thursday.

Such a move could erode revenues at a time the cash-strapped government is grappling with a large budget deficit and high debts, the international debt-watcher said.

To recall, Marcos last month promised to impose a P20 to P30-per-kilo price cap on rice. To do this, he said he would order the National Food Authority to buy rice from local farmers "at higher and more competitive prices."

The plan also includes tweaking the RTL to make it "more local farmer friendly" and "stop the country’s too much dependence on rice importations."

Enacted into law to respond to a rice shortage that hit the country in 2018, the RTL lifted the more than two-decade-old cap on rice imports, with excess tariff collections earmarked for projects targeted at improving local rice production. Data show the Bureau of Customs collected a total of P18.9 billion in duties from rice imports in 2021, up 22% year-on-year.

At this point, Fitch warned, any reversal of tax reforms instituted by the Duterte administration could lead to a credit rating downgrade.

Fitch has maintained the Philippines’ rating at “BBB”, an investment grade, but with a negative outlook after the pandemic tarnished the state’s fiscal health. A credit rating downgrade would make borrowing money offshore expensive for the government and make the country less attractive to foreign investors.

Imposing a new cap on imports could also push the prices of rice up again, Fitch added. In 2020, the Philippines was only 85% rice self-sufficient, and 15% of the country’s rice supply was purchased abroad.

"If the new administration amends the Rice Tariffication Law, as it suggested during its campaign, this could curb rice imports and push up the cost of rice. Amending the law could also hurt tax revenue," the credit rating agency said.

"The low tax take is a credit weakness for the Philippines, and when we affirmed the rating in February, we noted that a reversal of tax reforms that leads to sustained higher fiscal deficits could result in a rating downgrade," it added.

Sustainable?

As it is, Marcos’ proposed measures to make rice cheaper would be hard to sustain.

When RTL was enacted, the NFA was stripped of its import powers and its mandate was limited to providing emergency buffer rice stock to be sourced exclusively from local farmers.

This, in turn, meant lower procurement volumes, which helped trim NFA’s net loss by 37.8% year-on-year to P9.6 billion in 2021. The smaller volume of rice purchases also allowed the government to reduce its subsidy to NFA to P7.46 billion in 2021 from P30.65 billion in 2020.

In the past, the NFA’s "buy high, sell low" mandate to achieve price stability had burdened the agency with too much debts and drained public coffers. But with Marcos’ plan, the government would have to inject bigger subsidies to NFA again to sustain the P20 to P30-per-kilo price cap, something that could add more strain to the state’s balance sheet.

While RTL had faced criticisms, outgoing Socioeconomic Planning Secretary Karl Kendrick Chua urged the next administration to continue the law.

"By removing quantitative restrictions, we're able to address both the needs of the consumers and farmers... Those calling for removal risk taking away the P18 billion we give to farmers to improve their productivity," Chua said at a press conference.