Japan credit rating firm sees upgrade

09/08/2008

Japan-based credit rating firm Rating and Investment Information Inc. or R&I sees no drastic change in the country’s potential to grow this year and has affirmed its triple B minus (BBB-) rating.

R&I also hinted strongly of a credit upgrade for the Philippines over the near term, saying its rating outlook was “positive.”

This could mean a double B or BB rating for the Philippine the sovereign over the next 12 months provided the economic managers get it right and build on the country’s macroeconomic strengths.

“There appears little reason to expect that the underlying strength of the economy had changed significantly,” R&I said. It added the government seems bent on pursuing “appropriate efforts to manage annual expenditures, by expanding infrastructure investments while maintaining is fiscal deficit reduction stance.”

Demand-driven growth in the country has slowed but this was due to accelerating inflation, according to R&I.

Growth drivers that include remittances from overseas Filipino workers and the buoyant business process outsourcing sector were growing steadily, R&I said.

Its analysts urged the Philippines to pursue “measures to strengthen the fundamental building blocks for growth centered on infrastructure investment” while also implementing a public debt reduction plan.

“In this regard, the ability to continue improving the ratio of tax revenues to gross domestic product is likely to become the most critical issue,” R&I said.

“R&I will continue to closely watch government efforts to broaden the tax revenue base, including necessary tax system reform,” it quickly added.

Continued tax reform is a sensitive issue among the economic managers, particularly the value added tax regime which recently came under attack when the price of imported oil was constantly going up.

Finance Secretary Margarito Teves has held his ground and refused to buckle under the populist movement to have the VAT system, especially those imposed on petroleum products, recast and the tax abolished or suspended.

R&I noted VAT collections last year was lower than anticipated due to lower-than-expected inflation and the removal of the cap on input VAT.

The latter development, R&I said, “gives some reservations on the capability of fiscal authorities to manage revenues with the goal of achieving the program to reduce public debt to under 50 percent of the gross domestic product by the end of 2010.”

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