July 19, 2011, BusinessWorld Online

DEBT watcher Fitch Ratings supports the government’s focus on tax adminsitration and its public-private partnership (PPP) program, target by critics as of late.

“There is considerable progress to make in tax compliance. It is a low-hanging fruit,” Fitch Asia-Pacific Sovereigns head Andrew Colquhoun said during a media briefing yesterday.

“There is no point filling a bucket while it still has a hole in the bottom,” he added, referring to the Aquino administration’s current revenue tack that focuses on targeting leakages instead of levying new taxes.

Other than stamping out tax evasion and smuggling, the government must also “resist the temptation” to keep on giving tax breaks, Mr. Colquhoun said.

He noted that revenues only amounted to 14% of gross domestic product (GDP) last year due to various revenue-eroding measures such as tax exemptions for senior citizens, a lower corporate income tax and a slew of income tax holidays.

These measures ate away gains from increasing the value-added tax to 12% from 10% in 2006, which yielded a revenue-to-GDP ratio of 16%.

A Palace-backed fiscal incentives bill, which aims to streamline tax perks for businesses, is now up for plenary discussion at the House of Representatives.

The government’s economic blueprint, the Philippine Development Plan for 2011-2016, has also identified the fiscal responsibility bill as a priority. It would require legislators to match increases to state expenditures with revenue-generating measures.

Mr. Colquhoun admitted that it would be “difficult” for the government to significantly increase its tax take by simply focusing on tax compliance, based on the experience of other countries.

However, he said the country had other strengths such as “well-behaved” inflation, a healthy balance sheet and prudent fiscal and monetary policies.

“Even if the Philippines does not match the revenue-to-GDP ratio of other similarly rated countries (estimated at 26%), it does not immediately compromise the country’s ability to get a credit rating upgrade,” Mr. Colquhoun said.

Moreover, the Fitch analyst downplayed fears over the country’s stalled PPP program, which is the cornerstone of the Aquino administration’s economic agenda.

“Delays in implementation naturally come with big-ticket infrastructure projects,” Mr. Colquhoun said.

“Quality is more important than quantity,” he added.

Five PPP projects initially slated for bidding in the first semester are still undergoing further study. Seven other projects to be rolled out in the second half of the year are also being reviewed, with some likely to be pushed back to 2012.

Various analysts have aired concerns that the government’s chosen tax strategy and delayed PPP program could compromise the country’s revenue performance and growth prospects, dimming hopes of bagging an investment grade credit rating.

Fitch raised the Philippines’ credit score to BB+ from BB last month, bringing the country to just one level shy of investment grade. The government is now targeting to reach investment grade by 2013, to boost investor confidence and bring down its borrowing cost.

In order to do this, Mr. Colquhoun said the government must sustain its fiscal consolidation. “The fiscal outlook in the short term is favorable. There is a balance between revenue increases and expenditure control,” he said.

The government posted a P9.54-billion budget shortfall as of May, significantly below the P162.107-billion deficit seen a year ago. Revenues reached P581.501 billion, up 16.3%. Expenditures, meanwhile, shrank by a tenth to P591.041 billion.

The “tight” expenditure control is unlikely to be sustained in the second semester of the year, Mr. Colquhoun said. He projected that the budget deficit would reach 3% of GDP this year, down from the 3.7% registered last year and lower than the 3.2% cap set by the government.

Any “fiscal slippage” could bring down the country’s credit rating but this isn’t expected, he said, adding that in the medium term the Philippines must increase its revenues, “whether by tax efficiency or new taxes or higher rates of current taxes.”

The country must also work to spur investments and economic growth.

“Despite the Philippines’ very liquid position, the amount of investment in the economy is only 16% of GDP, versus Indonesia which has 30%,” Mr. Colquhoun said.

As a result, the country only averaged 4.9% growth in the last five years against Indonesia’s 5.7%. The Philippines’ average income is also estimated at $2,000 per head, while Indonesia has $3,000.

“Indonesia has a more than 50% chance of getting an investment grade rating than the Philippines, despite starting from roughly the same starting point,” Mr. Colquhoun said. — D. C. J. Jiao