Japan debt watcher to upgrade PH outlook on “Build,” tax reform programs

MANILA, Philippines–The ambitious infrastructure program coupled with comprehensive tax reform being pursued by the Duterte administration have allowed debt watcher Japan Credit Rating Agency (JCR) to upgrade its credit outlook for the Philippines, increasing the likelihood for a rating upgrade in the near future.

In an April 19 report, JCR kept its BBB+ credit rating on the Philippines, but raised the outlook to “positive” from “stable” previously.

A positive outlook meant that the credit rating may be upgraded during the near term; in the case of the Philippines, JCR may upgrade it to a higher single A credit rating.

“A single A credit rating will place the Philippines on the radar screen of even more portfolio investors, given that some institutional investors have a policy of investing only in bonds issued by A-rated sovereigns or corporate entities,” the government’s Investor Relations Office (IRO) said in a statement Friday.

“The improvement of the investment environment through infrastructure development had been a long-standing policy issue for the Philippines. However, infrastructure development has accelerated under the Duterte administration amid expanding expenditures based on its public investment program and improved budget execution rate brought by budget reforms,” JCR said.

“As part of its efforts to secure the necessary financial resources for such expanding expenditures, the government has been vigorously pursuing its comprehensive tax reform program (CTRP). A strengthened tax base and increasing revenues brought by robust economic growth have made infrastructure development possible while maintaining fiscal discipline,” JCR added.

“JCR holds that the country’s fiscal deficit will be maintained at manageable levels and the government debt as a percentage of GDP will keep declining moderately in the future. JCR has left the ratings unchanged in view of the need to assess progress on infrastructure development and the CTRP, but has changed the rating outlook from stable to positive,” it said.

Under “Build, Build, Build,” the government would roll out 75 “game-changing” flagship projects, with 25 expected to be completed during President Duterte’s term, in a bid to usher in “the golden age of infrastructure” by 2022.

The Duterte administration’s CTRP, meanwhile, was expected to add an average of P214.5 billion in tax revenues yearly over the medium term and bring the total revenue take above the P4-trillion level by 2022.

The IRO quoted Finance Secretary Carlos Dominguez III as saying that JCR’s latest credit rating action was a “recognition of the Duterte administration’s aggressive yet prudent economic policy of spending big on infrastructure modernization while maintaining fiscal discipline.”

“The Philippines’ robust economic growth is sustainable over the long haul, in part because of the Bangko Sentral ng Pilipinas’ commitment to maintain price stability and the soundness of the banking and financial system. The BSP will continue to provide an enabling environment for sustainable, robust, and more inclusive economic growth by staying committed to its price and financial stability mandates,” BSP Governor Benjamin E. Diokno, for his part, said.

Citing the Japanese debt watcher’s report, the IRO noted that “JCR also acknowledged that a healthy banking system is lending support to sustainability of the Philippines’ economic growth… [and] cited the banking system’s low exposure to bad debts, with the NPL [non-performing loans] ratio settling at 1.8 percent, and sufficient capitalization, with the capital adequacy ratio at 15 percent, last year.”

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.

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.

The Philippines current enjoys investment-grade credit ratings from the top three debt watchers, namely Moody’s Investors Service, Fitch Ratings and S&P Global Ratings. /jpv

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