A KOREAN DEBT WATCHER kept its credit rating for the Philippines at above minimum investment grade, citing tax reform and infrastructure spending gains even as rising prices continue to bite.
NICE Investors Service maintained the Philippines’ rating at “BBB,” a notch higher than minimum investment grade, with a “stable” outlook. This comes after an upgrade announced in January 2016.
The rating applies to the country’s long-term foreign currency borrowings, while a “BBB+” rating is given to loans denominated in the local currency.
A higher credit rating improves the chances for a country to borrow cheaply from abroad, especially as the Philippines scrounges for funds to finance infrastructure projects.
NICE cited the country’s sustained economic momentum as a source of optimism. It expects Philippine growth to clock in at 6.3% this year, slower than the actual 6.7% climb in 2017 and the government’s 6.5-6.9% target. Economic growth averaged 6.3% last semester, while the third-quarter performance will be announced on Thursday. BusinessWorld’s poll among 15 economists yielded a 6.3% median estimate for July-September, which if realized will be faster than the second quarter’s six percent pace.
The slower growth estimate comes as NICE priced in the impact of lower exports, a series of interest rate hikes and base effects.
However, the government’s “Build, Build, Build” program is seen to propel expansion.
“Due to massive buildup in infrastructure, government consumption and fixed investment are expected to boost growth. Albeit somewhat expansionary fiscal policy in place, the fiscal deficit will remain at a sound level and tax reform will contribute to broadening tax revenue,” the credit rater said in its Oct. 30 report.
“Containing inflation expectations is key to sustaining stable growth trend of the Philippines.”
Inflation averaged five percent in the nine months to September, a percentage point above the government’s 2-4% target band for whole-year 2018. The debt watcher noted this was partly due to food supply concerns and surging world crude prices, together with the impact of higher fuel excise taxes and a weaker peso.
The decision of the Bangko Sentral ng Pilipinas (BSP) to hike policy rates by a cumulative 150 basis points in order to temper inflation expectations is seen as a positive move, with the debt watcher noting that the recent spike in consumer prices is unlikely to “undermine macroeconomic stability in the short term.”
At the same time, fiscal reforms are also expected to help spur overall economic activity and should enable the government to remain prudent despite a growing budget deficit.
“The policy direction of the Duterte administration… to increase government expenditure through expanding tax base is deemed appropriate, given the need for infrastructure investment,” the credit analysts explained.
“The government’s tax reform and infrastructure investment acceleration are already showing tangible effects in 2018.”
Republic Act No. 10963, or the Tax Reform for Acceleration and Inclusion Act, imposed, among others, additional duties on fuel, cigarettes, alcohol and sugary drinks starting Jan. 1.
This has helped the government rake in P2.112 trillion in total revenues as of end-September, 17% more than a year ago.
Still, NICE said it will keep an eye on the government’s revenue-raising capacity as well as the fate of succeeding tax reform packages, noting that these measures would tell whether the Philippines can remain stable at a time of increased state expenditures.
The debt watcher pointed out that the second tax reform package, which reduces the corporate income tax rate and simplifies the tax incentives system is “desirable.” However, it flagged that the planned removal of redundant perks could lead to a contraction in investments, dampen business sentiment and leave people jobless in the near term.
NICE said the Philippines can be expected to weather rising oil prices, higher global yields and an escalating trade war between the United States and China given ample dollar reserves, remittances and small foreign portfolio investments. — Melissa Luz T. Lopez

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