Credit rater cites tax reform, infra dev’t plans

MANILA, Philippines – Moody’s Investors Service upgraded the country’s economic growth forecasts for the next two years as it believes the successful implementation of the tax reform and infrastructure development plans by the Duterte administration could boost the credit rating of the Philippines.

In its latest overview and outlook on the Philippines, Moody’s said it expects the country’s gross domestic product (GDP) to grow 6.5 percent this year and next year.

This was higher than the previous GDP growth forecast of 6.2 percent last July.

“We expect the largely domestic drivers of growth to remain intact over the next year. Overall, we expect real GDP growth to remain at around 6.5 percent in 2016 and 2017,” Moody’s said.

The economy grew seven percent in the second quarter from 6.8 percent in the first amid the strong boost from election related spending.

This brought the average GDP growth in the first half to 6.9 percent from 5.5 percent in the same period last year. This is within the higher end of the six to seven percent growth penned by economic managers.

Moody’s said the concrete plans of government to reform the tax system and accelerate infrastructure investments as being anchored on a “well defined development agenda.”

“In particular, an acceleration of infrastructure development and the passage of comprehensive tax reform would be credit positive,” it said.

Other factors that, if achieved, can drive the country’s credit rating moving forward are sustained rise in government revenues and further improvement in its external debt profile, Moody’s said.

At the moment, Moody’s assigns the Philippines a rating of Baa2, which is a notch above the minimum investment grade. This rating carries a “stable” outlook, indicating it is unlikely to change over the short term.

A rating within the investment-grade scale indicates a government’s ability and willingness to pay debts as they fall due, given the generally healthy economic and political conditions of a country. As such, an investment-grade credit rating gives a country a favorable image before foreign and local investors, among other stakeholders, thereby helping boost investments.

Finance Secretary Carlos Dominguez welcomed the recognition given by Moody’s to the Duterte administration’s economic programs.

“The positive mention by Moody’s of the tax reform and infrastructure plans of the Duterte administration proves that by looking beyond headline noise, one would see sound macroeconomic fundamentals and a robust, credible, and sensible overall socioeconomic development agenda for the Philippines,” Dominguez said.

“Recognition by credit rating firms and other stakeholders of reforms and sound policies in the Philippines is always welcome. This is because the international community’s awareness of positive developments in our country is important in sustaining favorable investor sentiment,” Investor Relations Office executive director Editha Martin said.

One of the key features of the tax reform plan, which has been submitted to Congress for legislation, is the phased-in reduction of corporate and income tax rates to 25 percent. At present, corporate income tax is set at 30 percent, while the maximum individual income tax is at 32 percent.

The proposed income-tax cut is meant to boost purchasing power of Filipino households and to encourage more enterprises to do business in the country. As a result, there would be more consumption and job-generating investment activities.

In tandem with the proposed income-tax cut are measures to compensate for the resulting revenue loss. These are expanded coverage of the value added tax, adjustment for inflation of the tax on oil, and imposition of excise tax on soft drinks and other sugary products.

These compensatory measures are meant to prevent erosion of overall government revenues.

On infrastructure development, the Duterte administration’s agenda entails consistent rise of the government’s annual spending for roads, bridges, transport facilities, and related projects from 5.4 percent of the country’s GDP in 2017 to 7.1 percent of GDP by 2022.