Philippines told to increase tax revenue if it wants investment rating

The Philippines need to introduce reforms to produce additional tax revenue, particularly if it wants to acquire an investment grade rating, according to an analysis published by ratings agency Moody’s.

In an analysis similar to the views previously expressed by Standard and Poor’s (S&P) last month, Moody’s has confirmed that its rating for the Philippines, which was upgraded in June to two notches below investment grade, is stable for the foreseeable future.

But Moody’s pointed out that the country’s tax revenue to gross domestic product (GDP) ratio, at an average of 14.7% in the period from 2006 to 2010, is way below its rating peers. In fact, it has been estimated that, without additional revenues, the ratio will still be around 15% this year, and will reach only 16% in 2014.

Therefore, while the government has been successful in reducing the country’s budgetary shortfalls, reducing its fiscal deficit down to 2.9% of GDP, lower than the government’s target of 3.2%, Moody’s has suggested that, to fulfil its development objectives and improve its credit rating, it should go further and pursue a tax reform programme.

Moody’s cited legislation for the rationalization of fiscal incentives, which is already being considered by parliament and supported by the government, as well as a reorganization of ‘sin’ taxes on alcoholic and tobacco products, as providing some movement towards its suggestion.

When he assumed office in June last year, Philippine President Benigno Aquino stressed that, to reduce the country’s then-increasing fiscal deficit, the collection of taxes should be improved before there was to be any thought of increasing tax rates, or of any new taxes.

In fact, in response to S&P, the government has already reiterated its view that it currently has no intention of introducing additional taxation, as it believes there are still significant increased revenues to be garnered by improving tax administration through strengthening the authorities’ powers to collect unpaid taxes and chase tax evaders.

S&P said that the country needs to expand its tax base and increase tax rates to significantly boost revenues and cut debt levels if it wants to win an investment grade sovereign rating.

S&P credit analyst Agost Benard said more steps were needed to improve its ability to generate and capture revenues and reduce reliance on expensive debt.   ‘They are on the right track and things are progressing in the right direction, but I think a fundamental and sustained revenue generation improvement is one of the hallmarks of investment grade countries,’ he told Reuters.

‘Countries in investment grade don't have revenues at 16% of GDP where they have to scrimp on infrastructure spending,’ Benard added.

Last November, S&P raised the Philippines' foreign currency credit rating to BB, two notches below investment grade. While last week Fitch upgraded its rating to one notch below investment grade, putting the Philippines on par with Indonesia.