By Melissa Luz T. Lopez
“IMPRESSIVE” gains from tax reform bode well for the Philippines’ credit rating, Moody’s Investors Service said, even as local political noise and tighter global financial conditions pose risks for the economy.
“[W]e have seen the tax reform pass, and we have seen the impact on revenue is even probably better than expected,” Moody’s senior credit officer Christian de Guzman said in a briefing yesterday.
“Revenue performance has actually been fairly good… It does go some ways to addressing the weaknesses of the Philippine fiscal profile.”
Moody’s affirmed its “Baa2” rating — a notch above minimum investment grade — with a “stable” outlook for the Philippines in June last year.
Back then, the debt watcher flagged “increased” domestic political developments as well as overheating concerns as possible downside risks to the rating.
At the same time, it said “greater revenue mobilization” would help boost the country’s creditworthiness.
Starting Jan. 1, Republic Act No. 10963, or the Tax Reform for Acceleration and Inclusion (TRAIN) Act, reduced personal income taxes for those earning below P2 million a year, alongside a simpler system for computing donor and estate taxes.
Foregone revenues will be offset by the removal of some exemptions to value-added tax; increased tax rates for fuel, automobiles, tobacco, coal, minerals, documentary stamps, foreign currency deposit units, capital gains for stocks not in the stock exchange, and stock transactions; as well as new taxes for sugar-sweetened drinks and cosmetic surgery.
Mr. De Guzman said last year’s rating affirmation did not yet price in the impact of TRAIN as it was then still in the legislative mill. Now, increases in revenue collections have proven to be encouraging.
He recalled that the Philippines was the lowest revenue earner among investment-grade countries in 2014, but recent changes has improved the country’s standing.
Mr. De Guzman said he expects state revenues to reach “over 16%” of gross domestic product (GDP) on the back of tax reform and administrative improvements that began under former president Benigno S. C. Aquino III and sustained under President Rodrigo R. Duterte.
“We are looking at a constellation of factors,” Mr. De Guzman said when asked about a possible rating upgrade.
“In the coming months when we start to see some of the dust settle with regard to the impact of TRAIN on inflation and the economy at large, when we have more clarity on prospects for further revenue reform… We will see how these stack up to our published rating triggers.”
The government intends to raise P2.846 trillion in revenues this year, 15.1% more than 2017’s P2.473 trillion and equivalent to 16.3% of GDP.
Revenue effort took a 15.82% share last quarter, improving from 14.91% the past year, according to the Finance department.
The bigger revenue-to-GDP share is also “impressive” in the context of economic growth, which Moody’s expects to clock 6.8% this year against the government’s 7-8% target and 2017’s actual 6.7%.
The Moody’s analyst also noted that economic growth will likely ease across Southeast Asia, even as the Philippines will remain resilient in the face of tightening credit conditions worldwide and higher crude oil prices.
Still, Mr. De Guzman flagged persistent political noise and resulting “polarization” of political sectors as a source of risk.
“Unpredictable” bilateral ties with China — consisting of closer economic cooperation on the one hand and a simmering maritime dispute in the South China Sea on the other — are also a key risk.
“We haven’t changed our overall view on political risks, those… remain elevated,” the credit analyst added.
“At the same time, we have not seen evidence of that political noise affecting this government’s ability to pass reform.”
Moody’s said Mr. Duterte still has enough political capital to push much-needed economic reforms through Congress. Hence, Mr. De Guzman said, he is confident that the remaining three to four tax reform packages will secure legislative approval within the year, as pushed by the Finance department. Succeeding proposals look to trim corporate income taxes to 25% from 30% while reducing tax incentives deemed redundant. A set of additional luxury taxes — higher duties on fancy cars and jewelry, duties on fatty food, as well as income taxes from lotto and casino winnings — may also be considered should there be a need to “augment” tax collections.