The Philippines’ “investment grade” is now undisputed, but authorities still face the challenge of getting the government’s finances in order, Moody’s Investor Service said in a new report.
In its credit analysis on the Philippines, the rating agency said despite recent improvements, government revenues as a proportion to the size of the economy was still well below that of most economies with investment grade distinction.
“A continued weakness in the Philippines’ fiscal strength is its revenue generation,” Moody’s said in a report released this week.
Data released earlier this year showed the government’s revenues relative to gross domestic product (GDP) improved to 15.6 percent in the middle of 2014 from 15.3 percent the year before.
Tax revenues also inched up to 13.7 percent.
For the whole of 2014, the government is targeting a tax-to-GDP ratio of 14.7 percent and a revenue to GDP ratio of 15.7 percent.
Partly in recognition of the government’s improving revenues, Moody’s upgraded the Philippines government’s sovereign credit rating to Baa2 or two notches above the “junk” status that the country had just two years past.
Standard & Poor’s gave the country a similar rating earlier in the year, while Fitch Ratings still has the Philippines at its minimum investment grade.
Despite rising revenues, the government still lags behind neighbors in the region.
Thailand, which is similarly rated as the Philippines, had a tax to GDP ratio of 16.5 percent in 2012. Malaysia, which is rated higher than the Philippines, collected taxes equivalent to 16.1 percent of GDP in 2012, World Bank data showed.
Moody’s said in 2013, only two other countries—the tiny Sharjah (A3 stable) and the Isle of Man (Aa1 stable)—recorded lower revenue to GDP “among investment-grade sovereigns.”
The rating firm still expects the Philippines to continue making improvements.
Revenue growth will be sustained at a level higher than nominal GDP growth for a fourth consecutive year in 2014.
Over the first 10 months of the year, reported revenues grew 12.6 percent year-on-year, up from 11.8 percent for the full year in 2013.
While tax administration measures at the Bureau of Internal Revenue (BIR)—amounting to 69.6 percent of total reported revenues year-to-date—were behind the improvement in revenue growth since 2011, receipts from BIR slowed to 11.0 percent year-on-year over the first 10 months of 2014 versus an annual average of 13.9 percent in the preceding three-year period.
Mitigating this slowdown at the BIR are reforms at the Bureau of Customs (BOC), which have propped up overall revenue performance.
BOC receipts grew by 18 percent through October this year, up significantly from an annual average of 5.6 percent in the preceding three-year period.