Phl needs more time to get credit upgrade — Credit Suisse

MANILA, Philippines -  Credit Suisse said the Philippines has to wait to get another upgrade from S&P Global Ratings and Moody’s Investors Service even with the passage of the government’s tax reform program.

Michael Wan, economist at Credit Suisse, said the country lags behind other countries with ratings of two notches above investment grade such as the per-capita gross domestic product (GDP) and revenue to GDP.

“We think the other two major agencies, S&P and Moody’s, will take longer to upgrade the Philippines further as it still lags other BBB+ sovereigns on metrics such as per-capita GDP and revenues to GDP,” he said.

He pointed out the central government tax revenue would likely rise by around 0.6 to 0.8 percentage points over the next five years while net additional revenue from tax reform would translate to a revenue to GDP ratio of 20 percent of GDP by 2020, however, these figures are still below other BBB+ sovereigns such as Mexico with 23 percent of GDP and Thailand with 22 percent of GDP.

The Philippines’ 24 positive credit rating actions since 2010 as well as the distinctions received by the country’s banking system provide strong validation for the economy’s solid performance.

The highlight of the Philippines’ credit rating history came in 2013 when we finally achieved investment grade rating from Fitch Ratings, Moody’s and S&P.

The country’s credit rating of Baa2 with Moody’s and its BBB rating with S&P are one notch above investment grade.

Last March 29, Fitch affirmed the ‘BBB-’ rating or minimum investment grade on the sovereign debt of the Philippines. The country’s outlook was upgraded to positive from stable in September 2015 but has yet to translate to an upgrade in rating.

Wan said the revised version of the tax reform package has just been approved in the House of Representatives after it was certified as urgent by President Duterte.

 “We believe what matters most from the credit rating agencies’ perspective is the revenues generated over time, and not just one year’s revenues. While the revised version of the bill implies that some revenues will be back-loaded, the total tax receipts generated by 2020 are actually quite similar,” Wan said.

 The economist said the additional tax reform revenues would allow the government to raise spending by one percent of GDP while still lowering overall government debt metrics.

 “We see a good likelihood that Fitch will upgrade the Philippines to BBB, from BBB- (positive), if the tax reform bill eventually passes as it is written,” Wan said.

He added the Philippines could have around one percent of GDP additional fiscal space from 2018 to 2019 without raising the trajectory of government debt.

He warned significant dilution to long-term revenues as the bill is now headed to the Senate could be negative for credit rating and infrastructure path.