Philippines: Tax reform to improve Phl fiscal stability — Fitch

MANILA, Philippines –  International credit rating agency Fitch Ratings said the passage of the first package of the tax reform program shows the commitment of the Duterte administration to improve the country’s fiscal stability and support its ambitious public investment program.

In a report titled “Philippine tax bill supports long-term fiscal priorities,” Fitch said the tax package passed by the House of Representatives last week would widen the tax base and boost revenue.

“The speed with which this first bill passed through the House – and President Duterte’s intervention to give it a push over the line – suggests that tax reform is a priority for government,” Fitch said.

The debt watcher pointed out tax reform is crucial to the rest of the administration’s 10-point socioeconomic agenda that includes plans to ramp up investment in infrastructure, health, education and social protection.

The Duterte administration vowed to raise infrastructure spending to 7.4 percent of gross domestic product by 2020 while keeping its budget deficit ceiling at three percent of GDP.

“It will be difficult to fulfill these plans – and also keep the budget deficit within the three percent of GDP target – without a medium-term rise in the revenue/GDP ratio,” it added.

Last March 29, Fitch affirmed the “BBB-” rating or minimum investment grade with a positive outlook on the country’s sovereign debt.

Estimates made by the Department of Finance (DOF) showed the full set of tax reform packages would boost revenue by two percent of GDP by 2019 while administrative measures that simplify tax bureaucracy would add another one percent of GDP to revenues.

“Low government revenue is currently a key weakness in the Philippines’ fiscal profile. The potential passage of proposed tax reforms was listed as a positive rating sensitivity when we last affirmed the Philippines’ BBB/Positive rating in March,” it said.

Fitch said general government revenue was equivalent to just 22 percent of GDP at end-2016, compared with a median 30 percent for “BBB” rated countries.

Early this week, Moody’s Investors Service said the passage of the first package of the comprehensive tax reform program (CTRP) would help the Philippines raise much needed revenues to finance infrastructure projects.

Christian de Guzman, senior credit officer for Sovereign Risk Group at Moody’s, said the passage of the Tax Reform for Acceleration and Inclusion (TRAIN) by the House of Representatives last May 31 is credit positive for the Philippines.

“The passage of the bill is credit positive because it will address the Philippines’ weak revenue generation,” he said.

Moody’s has placed the credit rating of the Philippines at Baa2 or a notch above minimum investment grade on a stable outlook. Likewise, The S&P Global Ratings has affirmed its ‘BBB’ – a notch above investment grade – rating on a stable outlook on the Philippines last April.