S&P revises PH outlook to ‘positive’ due to tax reform

Finance Secretary Carlos Dominguez III explains how the implementation of the Republic Act 10963 or the Tax Reform for Acceleration and Inclusion (Train) can benefit the citizens and the government during a press briefing at the New Executive Building in Malacañang on Monday, Jan. 8, 2018. (Photo by TOTO LOZANO / Presidential Photographers Division)

The Philippines would likely move up to a credit rating higher than minimum investment grade after debt watcher S&P Global Ratings on Thursday revised its outlook to “positive,” citing improved fiscal management following the passage of the first tax reform package.

From “stable” previously, a “positive” credit outlook meant that the Philippines’ long-term sovereign credit ratings, affirmed at ‘BBB’, may be raised over the next six months to two years.

At present, the credit ratings assigned to the Philippines by the three top debt watchers Fitch Ratings, Moody’s Investors Service and S&P were all one notch above investment grade.

S&P said that “the ‘positive’ outlook reflects our view that improvements to the Philippines’ policymaking settings could support a track record of more sustainable public finances and balanced growth over the next 24 months.”

“We may raise the ratings if the government’s fiscal reform program leads to further achievements over the course of the next 24 months. This would support more sustainable public finances and balanced economic growth prospects while maintaining stable fiscal deficits and net general government indebtedness,” S&P said, mainly referring to the Duterte administration’s comprehensive tax reform program, the first package of which was enacted into law in December.

Republic Act No. 10963 or the Tax Reform of Acceleration and Inclusion (TRAIN) Act since Jan. 1 this year jacked up or slapped new excise taxes on cigarettes, oil, sugary drinks and vehicles, among other goods, to compensate for the restructured personal income tax regime that raised the tax-exempt cap to an annual salary of P250,000.

“We may also raise the ratings if the government’s revenue enhancement measures lead to lower-than-expected deficits, which would have a knock-on effect on net general government indebtedness,” S&P added.

The Cabinet-level Development Budget Coordination Committee last Tuesday estimated additional revenues of P124.9 billion this year coming from the TRAIN Law.

The comprehensive tax reform program is expected to generate P215.8 billion in additional revenues in 2022.

The government had programmed a budget deficit cap equivalent to 3 percent of gross domestic product until 2022.

However, S&P warned that it may revert the outlook to “‘stable’ if the reform agenda stalls, if the recalibrated fiscal program leads to higher-than-expected net general government debt levels, or if we deem that policymaking settings have otherwise regressed against our expectations.”

In a text message to reporters, Finance Secretary Carlos G. Dominguez III welcomed S&P’s latest action, saying that “we appreciate this affirmation of the effectivity of the Duterte administration’s economic agenda.”

“It’s a result of good teamwork within the administration and with the legislature, for the benefit of the entire nation,” added Dominguez, who heads the economic team.

Credit ratings are a measure of a government’s creditworthiness. As the stability of state finances is also related to a country’s performance, credit scores serve as a proxy grade for the economy.

Also, improved ratings would allow the government to demand lower rates when it borrows from lenders, which could translate to lower interest rates for consumers and businesses borrowing from banks using government-issued debt paper as benchmarks for their loans.