PHL investment grade rating to be supported by sustained policy reforms
Continued policy reforms by the next administration will likely help the Philippines keep its investment grade credit ratings despite the higher debt burden, a Monetary Board member said.
“If you look at the history of the Philippines, there has been tremendous continuity in both monetary and fiscal policy, with the incremental reforms happening one president after another,” Monetary Board member Felipe M. Medalla said at an online regional macroeconomic conference series held by the Bangko Sentral ng Pilipinas (BSP).
“So I guess this is one of the reasons our credit rating has not been brought down in spite of the fact that ratio of public debt to GDP (gross domestic product), in particular National Government debt to GDP has risen,” he added.
Last week, Fitch Ratings retained its “BBB” credit rating for the Philippines, but kept a negative outlook for the sovereign rating due to the country’s medium-term growth trajectory and hurdles to bringing down debt.
A negative outlook means the sovereign rating could be downgraded in the next 12 to 18 months. The ratings agency warned a credit downgrade could happen due to failure to bring down the debt ratio caused by “a reversal of tax reforms or a departure from a prudent macroeconomic policy framework that leads to sustained higher fiscal deficits.”
The country’s debt-to-GDP ratio climbed to a 16-year high of 60.5% last year as the government borrowed more to finance its pandemic response. This surpassed the 60% threshold considered manageable by multilateral lenders for developing economies.
BSP Department of Economic Research Managing Director Zeno Ronald R. Abenoja said a technical working group composed of representatives from economic agencies are already laying out plans to address fiscal sustainability.
“An anchor right now that is being mapped out for the next five years is to ensure that the debt-to-GDP ratio of 60% does not increase so much above 60%. In fact, it’s projected to reach the peak maybe this year [or] next year at a little above 60%. But it should go down afterward, and behind that will be a commitment to reducing the fiscal deficit,” Mr. Abenoja said.
In 2020, the budget deficit reached a record high of 7.5% as spending increased while revenues slumped during the pandemic. The deficit ceiling for 2021 was set at 8.2% of GDP, with official figures expected to be released on Feb. 28.
For this year, the fiscal deficit ceiling is lower at 7.7% of GDP.
Mr. Medalla noted some presidential candidates want nontax revenues to be the main funding source for government expenditures, which he said will not happen as nontax revenues are only 10-15% of the total.
Based on latest data from the Treasury, only P2 billion of the P2.7 trillion in revenues as of end-November came from nontax revenues, while 93% or P2.5 trillion are from tax collections.
“Now, I think the ideal situation is there are no new taxes, but at the same time, you are able to reduce what we call tax expenditures,” Mr. Medalla, a former socioeconomic planning secretary under the Estrada administration, said.
He noted there are still loopholes in the country’s tax system, citing a study by the University of the Philippines School of Economics which found most of the incentives given by the Board of Investments were given to “firms that would have invested anyway without the incentives.”
“Of course, if all the political promises happen, somebody’s saying we will cut taxes and increase expenditures, then we run the risk of our credit rating deteriorating,” Mr. Medalla said.
Filipinos head to the polls on May 9 to elect national and local leaders. A new president will assume office on June 30.
Faster economic growth will boost fiscal sustainability, he said.
“If the economy is growing at 6-7%, collections at the BIR (Bureau of Internal Revenue) will rise by at least, if you add inflation, that’s 3%, and you add some elasticity, revenue will start growing at 10-11% per year,” Mr. Medalla said.
The economy grew by 5.6% in 2021 after shrinking by a record 9.6% in 2020. Economic managers expect the economy to grow by 7-9% this year.
“So that’s the other side making sure the economy succeeds, so that the growth of the economy is the one that provides the revenue that will finance much needed public expenditures,” Mr. Medalla said.
The government is looking to further open up the economy as coronavirus disease 2019 (COVID-19) cases decline.
Mr. Abenoja said a shift to an endemic approach to COVID-19 will help drive economic activity and increase tax collections.
The government has kept Metro Manila under Alert Level 2 until the end of the month. Business leaders backed a move to put the National Capital Region under the most relaxed Alert Level 1 starting March.