Moody’s says new upgrade hinges on tax reform efforts

A successful and efficient implementation of the Duterte administration’s tax-reform and infrastructure-development plans will boost the Philippines’ credit rating, credit watchdog Moody’s Investors Service said.

Moody’s currently rates the country’s debt at one notch above investment grade, or Baa2 with a “stable” outlook, indicating that the rating is unlikely to change over the short term.

Despite headline noise, political risk in the Philippines is still low, given that sound policies both in the economic and political fronts remain intact, Moody’s said.

In its latest commentary issued October 17, Moody’s described the concrete plans of government to reform the tax system and accelerate infrastructure investments as being anchored on a “well-defined development agenda.”

“In particular, an acceleration of infrastructure development and the passage of comprehensive tax reform would be credit positive,” Moody’s said.

Moody’s cited other factors that could lift the country’s credit rating, such as the sustained rise in government revenues and further improvement in its external debt profile.

A rating within the investment-grade scale indicates a government’s ability and willingness to pay debts as they fall due, given the generally healthy economic and political conditions of a country.

Its current rating gives the country a favorable image, thereby helping boost investments.

Finance Secretary Carlos Dominguez III said the positive mention by Moody’s of the tax-reform and infrastructure plans of the Duterte administration proves that by looking beyond headline noise, “one would see sound macroeconomic fundamentals and a robust, credible, and sensible overall socioeconomic development agenda for the Philippines.”

“The Duterte administration has been clear since the very beginning of what it wants to achieve for our economy over the next six years, and we will strive to remain on course to hit it: sustained and robust growth that will have lifted significantly more Filipinos out of poverty by 2022,” he added. “Recognition by credit-rating firms and other stakeholders of reforms and sound policies in the Philippines is always welcome. This is because the international community’s awareness of positive developments in our country is important in sustaining favorable investor sentiment,” Investor Relations Office (IRO) Executive Director Editha Martin said.

Dominguez said the tax-reform and infrastructure development plans were steps toward the direction of poverty-reducing economic growth.

One of the key features of the tax-reform plan, which has been submitted to Congress for legislation, is the phased-in reduction of corporate and income tax rates to 25 percent.

At present, corporate-income tax is set at 30 percent, while the maximum individual-income tax is at 32 percent.

The proposed income-tax cut is meant to boost the purchasing power of Filipino households and to encourage more enterprises to do business in the country. As a result, there would be more consumption and job-generating investment activities.

Along with the proposed income-tax cut are measures to compensate for the resulting revenue loss that are the expanded coverage of the value-added tax, adjustment for inflation of the tax on oil, and imposition of excise tax on soft drinks and other sugary products.

On infrastructure development, the Duterte administration’s agenda entails consistent rise of the government’s annual spending for roads, bridges, transport facilities, and related projects from 5.4 percent of the country’s gross domestic product (GDP) in 2017 to 7.1 percent of GDP by 2022.

At 7.1 percent, the ratio of the Philippines’s public infrastructure spending to GDP is expected to exceed those of neighboring countries.

The focus of infrastructure spending will be on areas outside Mega Manila, particularly on the country’s poorest regions to encourage more businesses to set up shops in the countryside and, therefore, spread growth throughout the country.

“The effectiveness of infrastructure development will be a major driver of long-term economic diversification and ultimately growth,” Moody’s said.

It expects economic growth of the Philippines this year and next year to outpace that of other Baa-rated countries, with the exception of India.

This outlook is consistent with the government’s economic-growth targets, set at 6 to 7 percent this year, 6.5 percent to 7.5 percent next year, and 7 to 8 percent in 2018-2022.

The Moody’s report expounded on the factors behind the Philippines’s existing investment grade credit rating of Baa2 with a “stable” outlook.

Moody’s rated the Philippines’s economic strength as high, citing robust economic growth, favorable demographics, and rising investments.

Institutional strength and fiscal strength are both rated moderate. “Institutional strength” is the ability of government institutions to implement sound policies, while “fiscal strength” is the overall health of government’s finances.

Lastly, the country’s susceptibility to event risks, which describes a country’s vulnerability to various risks that could potentially force the government to default on its debts, is favorably described as low.

Moody’s also said the risk of a banking system trouble in the country is low, noting that Philippines banks generally enjoy high capitalization, liquidity, and profitability, and that they are competently managed.

“The Philippines’s vulnerability to external shocks is also low, given the country’s current-account surplus, which is supported by sustained foreign-exchange inflows in the form of remittances and business process outsourcing (BPO) revenues,” Moody’s added.