Fitch: Manila must lift growth, pursue reform for upgrade

By Karen Lema, Reuters

Posted at Jul 19 2011 04:43 PM | Updated as of Jul 20 2011 12:44 AM

* Indonesia may get investment grade rating ahead of Phils

MANILA, Philippines - The Philippines must lift its long-term growth potential through higher investments and sustain fiscal reforms via structural changes in revenue collection if it wants to achieve investment grade status, Fitch Ratings said on Tuesday.

But Fitch said the prospects of Indonesia getting an investment grade rating ahead of the Philippines was higher given stronger growth in the country's Southeast Asian neighbor.

Fitch last month upgraded the country's credit rating to within one notch of investment grade, putting it on par with Indonesia, on its improving fiscal position and budget management, favourable economic prospects and strengthening external finances.

"We are indicating the pressures on the ratings, upwards and downwards, as broadly balanced over the next 12 to 18 months," Andrew Colquhoun, head of Fitch's Asia-Pacific sovereign ratings, told reporters in Manila when asked about the Philippines' rating.

"Further positive rating action would be dependent on structural reforms to raise investments and growth, and continued fiscal discipline management," Colquhoun said, adding these reforms would likely take effect over the medium term.

Fitch said in a report in April Indonesia's prospects of securing an investment grade rating would be hinged on sustained economic growth and continued strengthening of its external balance sheet. It has a positive outlook on Indonesia's long-term foreign currency rating of BB+, putting it a notch away from investment grade

Borrowing costs

An investment-grade rating for the Philippines, one of Asia's most active sovereign issuers of foreign debt, would lower its borrowing costs and widen the base of its potential investors as some funds have restrictions on holding sub-investment grade debt.

It would also aid the Philippines in securing cheap long-term financing for major upgrades of its road, airport, and rail systems, a move aimed at helping spur economic growth.

Fitch said poor revenue collection in the Philippines remained a weak spot, although "there has been some tentative early signs of improvement."

Philippine President Benigno Aquino has been working to improve revenue by fighting corruption and enforcing existing tax laws, saying an increase in tax rates or additional taxes were unlikely this year.

"If we look at the experience of other countries, significantly increasing the tax revenue take purely through administrative and compliant measures is difficult to do," Colquhoun said.

Manila's budget deficit should fall to 3% of GDP this year, close to a government goal of 3.2%, from 3.7% last year, Colquhoun said, adding he expected state spending to recover in the second half.

Colquhoun also said he expected the central bank to meet its 2011 inflation target of 3% to 5% this year, and may possibly raise its policy rate by at least a quarter percentage point before the end of the year.

The Bangko Sentral ng Pilipinas left rates on hold last month at 4.5% but raised banks' reserve requirements by one percentage point to dampen liquidity pressures from strong capital inflows.

Fitch forecasts the Philippines to grow 4.5% this year and 5% next year, lower than a government target of 7% to 8% expansion this year and the next.