MANILA – An economist of Philippine National Bank (PNB) expects an upgrade to A-level of the country’s credit rating once legislators approve the remaining tax reform measures.
“The likelihood of reform implementation by government/Congress with favorable and lasting credit effects (strengthen public finances and debt payment capacity) has improved over the next year or so,” PNB economist Jun Trinidad said in a report.
He identified the crucial tax reform measures as the Corporate Income Tax and Incentives Rationalization Act (CITIRA) and the Passive Income and Financial Intermediary Taxation Act (PIFITA).
Trinidad considers CITIRA as the factor that will provide the “supply response” from the companies that will benefit from it since it will reduce corporate income tax (CIT).
He said savings that companies will incur as a result of lower taxes “could be deployed for upgrading production efficiency (e.g. new capacity or systems) or for boosting labor productivity e.g., staff training, acquiring new skill sets.”
The lower taxes will also support better dividend policy of companies, he said.
“For the SME (small and medium enterprises), it is hoped that the lower CIT over time would improve the likelihood of tax compliance and thus improve collection efficiency of corporate income taxes. We believe benefits of the CIT cuts would offset the employment costs in the rationalization of fiscal incentives,” he added.
The report said PIFITA will “strengthen the savings culture and broaden household preference to invest in financial assets and not just in real assets, e.g. fancy cars.”
This as less than 40 percent of Filipino household access the formal banking system, it said.
Trinidad said the approval of these tax reform proposals “hopefully within the year and another investment credit rating upgrade from Fitch next year would burnish the appeal of local and foreign currency-denominated Philippine financial assets to offshore investment flows.”
He cited Fitch Rating’s decision last February 11 to upgrade its stable outlook on the country’s ‘BBB’ investment grade rating to “positive”.
The debt rater changed its outlook on the country’s investment grade ratings after citing expectations that the government will sustain “adherence to sound macroeconomic policy framework that will support high growth rates with moderate inflation, progress on fiscal reforms that should keep government debt within manageable levels, and continued resilience to its external finances.”
“In our view, Fitch stands ready to hike the country’s investment credit rating upgrade to the next level if we see passage of key fiscal and macro reform measures, closing in on the coveted ‘A’ ratings,” he said.
Trinidad further said these proposed measures will further strengthen public finances and improve the state’s capacity to spend and address short-term losses in employment, incomes, impact of natural disasters on infrastructure, among others.
These measures are also projected to sustain low risk of debt default, he said.
“A key market positive given this backdrop is we expect less episodes of long-term debt yields spiking up (or extreme market sell-down(s) in reaction to fiscal funding risk amid correlation of local bond yields with US treasuries,” he added. (IA/SOVEREIGNPH.COM/PNA)