MANILA, MARCH 7, 2007 (STAR) By Des Ferriols - Fitch Ratings has affirmed its positive rating for the Philippines but warned the government of the need to improve its tax collection if it wants to sustain its fiscal gains.

"An extended period of restrained spending and the successful implementation of the VAT (value added tax increase) in 2006 demonstrate the government’s clear commitment to fiscal prudence," James McCormack, head of Asia Sovereigns at Fitch, a credit-rating agency, said.

Fitch said boosting the country’s credit worthiness are its balance of payments performance, external debt repayment profile and international liquidity position.

"Given the country’s external finance profile, even a relatively weak fiscal position should not hamper the sovereign’s capacity to repay its foreign debt obligations," McCormack said.

McCormack said the primary surplus increased from 0.6 percent of gross domestic product in 2003 to an estimated 4.1 percent of GDP last year. Over the same period, consolidated general government debt fell by nearly 14 percentage points of GDP, to 58 percent of GDP.

Fitch expects the Philippines foreign exchange reserves to top $22.1 billion by end-2007.

Fitch affirmed the Philippines’ long-term foreign currency issuer default ratings at BB and BB-plus. It also affirmed the short-term issuer default rating at BB-plus.

Fitch said the Philippines in recent years has devoted much of its "fiscal adjustment" to balancing its books but efforts could be imperiled by lackluster tax collection.

"Philippine tax policies and the various programs to enhance collection have yet to deliver meaningful results," McCormack said.

He said revenue growth was "only marginally faster than nominal GDP," not counting the gains from the VAT increase.

Fiscal flexibility, Fitch added, "remains severely constrained," noting that interest payments were equal to 30 percent of government revenue.

Fitch also pointed out that the government’s debt burden, while declining, still compared unfavorably with those of its rating peer group.

"There are 21 sovereigns in Fitch’s ‘BB’ category, and government debt is falling in 20 of these countries," Fitch said. "As a result, Philippine debt ratios are forecast to be no closer to ‘BB’ medians by end-2007 than they were in 2002."

Finance Secretary Margarito Teves said the Arroyo administration welcomed Fitch’s decision to retain its ratings, admitting that the fiscal consolidation was far from complete.

But Teves said there was little the government could do beyond implementing revenue-enhancing measures to support increased infrastructure and social spending.

He stressed the administration intended to build on its 2006 gains through reforms to balance the budget by 2008. However, none of the reforms involved tax measures.

The International Monetary Fund said the government needs new tax measures for it to make good its promise of higher infrastructure spending.

One of the reforms eyed is the "rationalization" of the government’s investment incentives program. The reforms, if set in place, are expected to raise the government’s earnings by P20 billion more yearly.

Teves said the initiative has been shelved because the Arroyo administration wanted to demonstrate first that it could collect the VAT before lobbying for more tax measures. – With AFP

Chief News Editor: Sol Jose Vanzi

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