When ratings agencies give the thumbs-up sign to a sovereign state, it simply means the subject nation is practicing good housekeeping. As in a household, the state is managing its resources efficiently and trying its best to live within its means.
The economic recovery and the implementation of economic reforms have strengthened the government’s fiscal condition, and no less than a major credit rating agency praised the country’s improved performance despite the impact of the pandemic on businesses.
It is a message to investors that economic fundamentals in the Philippines remain solid, and serves as an assurance to the people that the government has enough money to sustain its programs, projects and public services.
The reopening of the economy allowed more businesses to operate, which in turn enabled them to pay taxes to the national government and local government units.
The Bureau of Internal Revenue reported that its tax collection in April, traditionally a peak season for the agency, climbed by more than 40 percent to P336.020 billion. Its four-month haul reached P841 billion and exceeded last year’s collection by 14 percent as well as its target for the period by 1.7 percent.
Imports also increased to meet the needs of the growing economy, allowing the Bureau of Customs to collect higher duties. Customs collections rose 2.9 percent to P67.6 billion in April and 10.7 percent to P281.4 billion in the first four months.
As a result, the government posted a budget surplus of P66.8 billion in April, or more than 13 times higher than the result in the same month last year. The April surplus trimmed the budget deficit in the first four months to P204.1 billion, or more than a third lower than the P311.9-billion shortfall in the same period last year.
Policy reforms are also supporting the growth in revenue collection. Per the Department of Finance, these reforms generated an additional P202 billion in revenues in 2022, which prevented the government from incurring higher debt.
The government is borrowing to finance the budget deficit but its capacity to pay debt also increased. The outstanding government debt stood at nearly P13.9 trillion as of end-March, or just about 61 percent of the gross domestic product.
Other countries have much higher debt-to-GDP ratio. Japan, for example, has a debt-to-GDP ratio of more than 260 percent, while the US has nearly 130 percent.
Fitch Ratings on May 22, 2023 affirmed the credit rating of the Philippines at “BBB,” which is a level above the minimum investment-grade, while revising the outlook on the country’s long-term foreign-currency issuer default rating to “stable” from “negative.”
Per Fitch, the revision of the outlook to stable reflects its improved confidence that the Philippines is returning to a strong medium-term growth after the Covid-19 pandemic.
“The revision also reflects our assessment that the Philippines’ economic policy framework remains sound and in line with ‘BBB’ peers, despite its low scores on World Bank Governance indicators,” says Fitch.
The rating agency noted that while growth moderated to 6.4 percent in the first quarter of 2023, with the post-pandemic recovery boost fading, ongoing reforms to the business environment and investment regulations are creating an upside potential for growth.
I share government officials’ belief that the upgrade on the country’s credit outlook represents a vote of confidence on the economy and the reforms put in place by the government in recent months.
The structural reforms include the amendments to the Public Service Act, Foreign Investments Act and Retail Trade Liberalization Act, along with the Corporate Recovery and Tax Incentives for Enterprises Act.
The government likewise enhanced the rules and guidelines on public-private partnerships to spread the financial obligation in infrastructure development. More reforms are underway, per Finance Secretary Benjamin Diokno, who spearheaded the drafting of the six-year Medium-Term Fiscal Framework to promote fiscal sustainability and charts measures to cut down the annual budget deficit.
The government aims to increase the tax effort, or the share of tax collections in relation to GDP, from 14.6 percent in 2022 to 17.1 percent by 2028. Ideally, though, the tax effort should represent about a fifth or 20 percent of the GDP for an emerging country like the Philippines. Several European countries such as France, Denmark and Belgium have a much higher tax-to-GDP ratio of more than 40 percent.
I am confident that the efficient government revenue collection will continue in the coming years as the economy expands and policy reforms take effect. Again, as in good housekeeping, these will assure enough food on the table for our growing population.