‘RP credit rating now stable’

What a difference a new law makes.

An international investment ratings agency revised its outlook on the Philippines’ long-term foreign and local currency ratings yesterday from "negative" to "stable" after President Arroyo signed the expanded value-added tax (VAT) bill into law.

Fitch Ratings said it also affirmed the country’s long-term foreign currency and long-term local currency ratings to "BB" and "BB-plus," respectively.

The agency also affirmed the country’s short-term foreign currency rating at "B" and the foreign currency ceiling at "BB."

Fitch said the outlook revisions reflect the recent passage of tax laws that are aimed at boosting the country’s fiscal position.

"We had to wait a long time for this package but it has been worth it," said Brian Coulton, senior director of Fitch’s Sovereigns Team in Asia. "The policy response that has taken shape is really quite something in the Philippines’ historical context and should mark the turning point in the country’s fiscal profile."

Coulton was quick to point out, however, that the "stable" outlook assumed that the Arroyo administration will persist with the implementation of its fiscal reform efforts.

According to Coulton, Fitch also assumed that the Arroyo administration would "avoid the temptation to spend an excessive portion of additional tax revenues or ease up on efforts to improve tax administration and the health of state enterprises."

Last Tuesday, the President signed into law the new VAT measure that is expected to raise up to P80 billion in additional revenue next year.

Malacañang welcomed the upgrade by Fitch, saying its efforts to address the fiscal deficit do not go unnoticed and "are now appreciated by the international community."

"What we’ve been saying is that the President is exerting her best to put our fiscal house in order and this latest upgrade reflects the confidence of the international community on the prospects of the Philippines as an investment destination," Press Secretary Ignacio Bunye said.

He said the government is looking forward to more positive developments "as we pursue our reform program which has now moved on its second phase."

Presidential Consultant on Investor Relations Cora Guidote said the upgrade was a confirmation that the government’s fiscal reform programs is going to produce positive results in the next six months.

"We’re not in the danger zone anymore," Guidote said in a telephone interview. "We can only hope that the others (rating agencies) would do the same."

Guidote said the Fitch rating upgrade was "a very good prelude" to the arrival of the team from Standard & Poor’s who will coming to the country next week to assess the government’s fiscal health.

She said the government’s economic managers are getting "very positive indications" from the S&P that may lead to an upgrade.

"We will try to convince them that we deserve an upgrade," Guidote said.

The administration is struggling to stave off a possible fiscal crisis that could derail Mrs. Arroyo’s program aimed at reducing the wrenching poverty in the country.

Rampant tax evasion, corruption, bloated state subsidies and protectionism have been blamed for the government’s fiscal woes.

Mrs. Arroyo has also implemented measures to reduce spending and red tape, as well as launching a crackdown on corruption to help ease the budget crunch.

The Arroyo administration earlier said the passage of the VAT law was crucial to avoid further downgrades by investment ratings agencies.

In February, Moody’s Investors Service downgraded the Philippines’ sovereign debt rating by two notches, effectively placing the country four levels below investment grade.

The downgrade came on the heels of another downgrade, this time by Standard & Poor’s, which lowered the Philippines’ rating by a notch after it deemed that the government was not doing enough to address its chronic budget deficit.

The downgrades make it more difficult for the country to attract investors as well as to secure foreign loans.

Fitch’s outlook upgrade was lauded by the Bangko Sentral ng Pilipinas (BSP) which had earlier decried negative statements made by another influential credit rating agency, Moody’s.

"This is great news," BSP deputy governor Amando Tetangco said. "It’s a recognition of our success in the long and often difficult process of fiscal consolidation."

Coulton said that based on the Fitch estimates, the new tax package should help the government’s fiscal deficit to fall to 3.2 percent of gross domestic product this year from 3.9 percent in 2004. In 2006, he said the deficit was predicted to fall to 2.7 percent of the country’s GDP.

GDP is the total value of goods and services produced within a country in a year, minus net income from investments in other countries.

On the other hand, Coulton said the primary balance was expected to improve more rapidly from 1.5 percent of GDP in 2004 to over three percent in 2006.

The primary balance reflects policy-driven movements in public finances, Coulton said. Even allowing for some pick-up in non-interest spending after 2005, he said the improvement would still be significant.

As of 2004, the country still managed to sustain a small primary balance of about P73 million. This means that the Arroyo administration has so far avoided accumulating new borrowings over and above what is required to service its existing obligations.

"The prospects of increased primary surpluses should, in combination with still-healthy nominal GDP, see public debt ratios decline firmly over the short and medium term," Coulton said.

However, Fitch noted that the Philippines’ public debt ratio was still high at an estimated 73.4 percent of GDP as of end-2004 for the government and even worse at 95.6 percent of GDP for the public sector excluding government financial institutions.

But Coulton said the government debt was expected to fall below 70 percent of GDP by 2006 even allowing for the transfer of debts from the National Power Corp. to the government.

"While the interest payment burden will remain heavy for the foreseeable future, the ratio of interest payments to revenue should start to fall after 2005 in contrast to our earlier projections," Coulton said.

Fitch said its outlook upgrade was supported by the stability in the Philippines’ external finances, as the country’s current account registered its seventh successive year of surplus in 2004 at 2.4 percent of GDP, with continuous support from remittances from overseas Filipino workers.

"Stronger than expected portfolio investment inflows this year have supported the capital account and official foreign exchange reserves which grew to their highest levels in three years," Fitch said in its report. — With Paolo Romero