By Luisa Maria Jacinta C. Jocson, Reporter

THE PHILIPPINES’ fiscal consolidation plan may be too “ambitious,” the International Monetary Fund (IMF) said, noting that the government still has room to raise taxes to generate much-needed revenues.

IMF Mission Chief Elif Arbatli Saxegaard said the Philippine government is set to continue its fiscal consolidation over the medium term although at a slower pace than initially envisioned.

At a press briefing on Monday, she said the government’s fiscal consolidation targets remain “ambitious.”

“It is indeed the case that fiscal consolidation is slower over the medium term and that’s driven by a slower revenue mobilization and at the same time there is also a shift to higher spending on infrastructure,” she said.

Apart from improved tax administration, Ms. Saxegaard said that the government can consider raising taxes to generate more revenues.

“We do believe that there is significant scope to raise revenues through tax administration measures… But we also think that there is also room to raise revenues including through higher tax policy measures,” she said.

This year, the government has set the deficit ceiling at 5.6% of gross domestic product (GDP), equivalent to P1.48 trillion. The government is seeking to bring down the deficit-to-GDP ratio to 3.7% by 2028.

Finance Secretary Ralph G. Recto earlier said there are no plans to impose new taxes throughout the Marcos administration, but will instead focus on improving tax collection efficiency, and privatizing state assets.

“Tax administration improvements should be supplemented with tax policy changes, notably to improve the efficiency of value-added tax and broaden the tax base,” Ms. Saxegaard said.

She noted that introducing higher taxes should be timed appropriately.

“Timing is important to implement those measures and we think that the fiscal consolidation of course is possible, but it would be even more strengthened through measures that raise revenues.”

The IMF noted the government can further improve efficiency in value-added tax (VAT) collection.

“That doesn’t necessarily require an increase in the tax rate. But really base-broadening and improving its implementation can be one area, for example,” Ms. Saxegaard said.

The Finance department last year reported that the Philippines had the lowest VAT efficiency level in Southeast Asia. From 2016 to 2020, the Philippines collected an average of P723 billion from VAT, around 40% of the expected VAT collection.

The government can also review existing tax exemptions, Ms. Saxegaard said.

“Some measures could be to reduce some of these exemptions and improve the tax refund system, which can increase compliance. That’s another potential,” she said.

IMF Representative to the Philippines Ragnar Gudmundsson said that there is a “significant untapped revenue potential” in these exemptions.

“There’s a large range of exemptions and incentives that have been provided to businesses. The idea is not that incentives should be done away with, but maybe greater selectivity in granting those incentives and exemptions, and making sure that they actually contribute to economic growth,” he added.

The IMF also said there is “significant scope to improve” on tax administration, such as boosting digitalization efforts and enhancing ease of compliance for taxpayers.

‘GRAY LIST’
Meanwhile, the IMF noted the country’s continued progress in trying to exit the “gray list” of the Financial Action Task Force (FATF).

“We are happy to see that there’s a sort of all-hands-on-deck approach in the government to really try to get the Philippines off the FATF gray list. It’s not an easy process involving many institutions, many parts of the government,” Ms. Saxegaard said.

“It’s a very huge undertaking and we commend the authorities’ efforts on this front. They are really committed, and I think they are making significant progress,” she added.

The Philippines has been on the FATF’s list of jurisdictions under increased monitoring for dirty money activities since June 2021.

“It’s hard for us to know what the FATF will decide, so it’s not up to us to speculate on that. But our hope is that the Philippines gets off the list, building on this reform process that they’ve already initiated,” she added.

Ms. Saxegaard said that if the country can exit the list, this would lead to a boost in investments.

“Continued progress with improving anti-money laundering and combating the financing of terrorism (AML/CFT) effectiveness and completion of the Philippines’ Action Plan with the FATF are critical to improve the business environment and encourage foreign direct investment,” she added.

THE PHILIPPINE BANKING industry’s revenue prospects are seen to further improve this year amid strong lending growth and an expected delay in policy easing, Fitch Ratings said.

In a commentary, Fitch said that it revised its outlook on the Philippine banking sector to “improving” from “neutral.”

“We expect banks to be able to preserve their record-high net interest margins (NIM) for longer due to a delay in policy rate cuts,” it said. “This, coupled with a sustained rise in higher-yielding consumer lending and rollout of key infrastructure projects, is likely to buoy banks’ revenue prospects for the rest of 2024.”

The Monetary Board has kept its key policy rate steady at a 17-year high of 6.5% since October 2023. Bangko Sentral ng Pilipinas (BSP) Governor Eli M. Remolona, Jr. previously signaled the first rate cut could be done as early as August.

Fitch expects the BSP to begin its policy easing cycle this year but noted that the “gradient of normalization is gentler than we previously forecast.”

“We believe the extension in higher interest rates will have a manageable impact on the sector’s asset quality given the resilient economy, with Fitch projecting GDP growth of 5.8% in 2024,” it said.

Fitch said higher interest rates will allow banks to maintain asset yields for most of the second semester.

“Meanwhile, the sustained expansion in higher-yielding unsecured lending should result in incrementally better NIM, which we now project to expand by about 7 basis points (bps) for the year, reversing from a 7-bp contraction previously,” Fitch said.

It said there is “upside potential” for the forecast if the BSP further cuts the banks’ deposit reserve requirements this year.

Mr. Remolona has also signaled that he is seeking to reduce the reserve requirement ratio to 5% from the current 9.5%.

The credit rater also said it expects Philippine banks’ loan growth and business volume to remain “healthy” this year. It raised its credit growth outlook to 11.5% from 9.8% previously amid a robust economic outlook.

Latest data from the central bank showed that bank lending grew by 9.6% to P11.91 trillion as of end-April from P10.87 trillion a year ago, its fastest pace of growth in 12 months. This was attributed to sustained credit card lending and increased loans to the construction and transportation sectors.

“Demand for credit card and unsecured personal lending is less sensitive to policy rate movements and we expect the implementation of more infrastructure projects with private-sector participation to further prop up loan growth in the coming months,” Fitch said.

Meanwhile, Fitch said asset quality risks are still manageable despite the elevated interest rate environment.

“The rising share of riskier consumer lending points to inherently higher credit risks on the banks’ loan portfolio, but the healthy economy and job market prospects should help to limit the increase in impairment on the banks’ consumer loan books in the near term,” it said.

“Most large corporates also continue to hold comfortable financial buffers over projected debt-servicing needs.”

The Philippine banking industry’s nonperforming loan ratio rose to 3.45% in April, its highest level in 11 months. Bad loans jumped by 12.3% to P480.648 billion from P427.881 billion a year earlier. — Luisa Maria Jacinta C. Jocson