Credit rating downgrade a looming reality

In recent statements by two of the world’s leading credit rating agencies, risks to the Philippines’ current credit standing – currently a grade above minimum investment with stable outlook – if left unresolved, could lead to potential downgrades.

Fitch warned of “overheating” dangers, notably because of rising inflation, rapid credit growth, and a widening trade deficit. An eventual rejoinder, however, stated that the dangers were being adequately dealt with by the appropriate government agencies.

Moody’s, on the other hand, chose to tackle emerging issues not directly related to the economy. In particular, it said President Duterte’s “contentious policies on law and order over the past two years, as well as other political controversies, may have a negative impact on the Philippines’ attractiveness to financial and physical asset investors.”

Two other governance issues were flagged by Moody’s, the first dealing with a recent Supreme Court decision allowing local government units (LGUs) to get a “just share” of “all” national taxes, and not just from the national internal revenue taxes as is currently done.

The second governance issue involves the proposed shift to federalism, which would most likely further redirect huge portions of the national government revenues to the proposed federal states.

Increasing demand for funding

Moody’s recent assessment bears more attention, especially since the government’s ambitious Build Build Build will need between P8- to P9-trillion over the next four years. This amount of funding will rely on solid fiscal discipline, i.e., from every peso that the national treasury can collect and retain.

Both the SC’s recent ruling and the move to a federated government would reallocate huge amounts of the current tax collections of the national government to the local government, including the proposed federal states.

Budget Secretary Benjamin Diokno had earlier given an estimate that the cost of the SC decision would be between P1.2 trillion and P6 trillion a year. The Philippine Institute for Development Studies, the government’s primary socioeconomic policy think tank, estimated that the country could spend an additional P44 billion to P72 billion to shift to federalism.

The Department of Budget and Management is expected to ask the Office of the Solicitor General to file a motion seeking a reversal of the SC’s decision on the internal revenue allotment (IRA) for LGUs.

Socioeconomic Planning Secretary Ernesto Pernia, on the other hand, called for more studies on the proposed shift to federalism, particularly its effect on the Philippine economy. He estimated that the country’s fiscal deficit to GDP (gross domestic product) ratio could easily jump to six percent or more.

Both Pernia and Moody’s also expressed views that the regions may not be ready for federalism, with Moody’s singling out the local governments’ poor ability to manage fiscal resources.

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