MANILA, JULY 25, 2007
(STAR)  By Iris Gonzales and Marvin Sy - Global rating agency Fitch Ratings said yesterday the government’s fiscal performance in the first half of 2007 was disappointing and that the budget deficit could reach P125 billion this year, way above the target of P63 billion.

In her State of the Nation Address on Monday, President Arroyo promised record investments to boost growth after years of belt tightening. But Fitch said those plans would not materialize unless tax revenues increased.

“In the absence of a significant improvement in tax collection, it will not be possible for the Philippine government to implement its ambitious and much-needed infrastructure development program,” Fitch said.

The London-based credit rating agency’s original deficit forecast for 2007 stood at P111 billion. Fitch’s revised deficit forecast of P125 billion, which excludes privatization, is equivalent to 1.9 percent of gross domestic product (GDP).

Responding to Fitch’s statement, Finance Secretary Margarito Teves said the government’s P63-billion deficit target remains achievable.

The Department of Finance (DOF) even disputed the formula used by Fitch to come up with its budget deficit forecast for this year.

“We all know that it was disappointing (first half fiscal performance). Fitch did not say anything new. What was rather unclear in their forecast was it appears they merely multiplied the deficit that was programmed this year by two and arrived at P125 billion,” Teves said.

According to Teves, what was clear was that Fitch did not input the privatization targets of the government for the second half of the year.

The government is banking on using the proceeds from the privatization of several of its assets, including two big-ticket items, to bridge the revenue gaps from the first half of the year brought about by shortfalls in the collections of the Bureau of Internal Revenue (BIR) and the Bureau of Customs (BOC).

Fitch said, however, that the positive momentum behind Philippine fiscal performance in recent years faltered badly in early 2007, particularly with respect to tax collection.

“With real economic growth expected to have averaged about 6.5 percent in the first half of the year, the 3.4 percent increase in tax receipts was rather poor,” said James McCormack, head of Asia Sovereigns at Fitch, in a report. He also expressed skepticism that the government would be able to raise enough revenues despite promises to implement new fiscal reform measures.

“We are skeptical because it’s not the first time we heard about the (new fiscal reform measures)… that’s been on the table for several years already,” McCormack said in a television interview.

He said the programs have not resulted in significant gains and that there has been very little effect as far as improving the country’s fiscal position is concerned.

The government’s budget deficit in the first half of the year had swelled to P41 billion, or higher than the target for the period of P31 billion.

This as the government’s two revenue agencies – the Bureau of Internal Revenue and the Bureau of Customs – both failed to meet their collection goals for the period. Data from the DOF showed that the BIR incurred a revenue shortfall of P38.6 billion during the period as revenues reached P334.7 billion against the target of P373.3 billion.

The BOC incurred a shortfall of P13.1 billion as collections reached P92.2 billion during the period or below the target of P105.3 billion.

In response to the poor revenue performance, the government has stepped up its privatization program and intends to improve tax administration. Even so, Fitch does not believe it will be possible for the first-half tax shortfall to be made up over the balance of the year.

“In our view, optimism regarding revenue prospects in the short term is unwarranted, since various measures to improve tax collection and reduce evasion have been in place for some time, without meaningful results,” added McCormack.

Fitch indicated that, despite the increase in its 2007 deficit forecast, the sovereign credit ratings of the Philippines are still supported by an ongoing trend of declining government debt ratios.

General government debt at end-2007 is projected to reach 59 percent of GDP, down from a peak of 79 percent in 2004. In addition, the balance of payments remains healthy, led by strong remittance growth, allowing for the continued accumulation of foreign exchange reserves. An ongoing fiscal strength is tight control over expenditure, which is confirmed by preliminary 2007 data.

Putting recent fiscal performance in a medium-term context, Fitch said it is critical for government revenue to increase if public spending needs are to be met without incurring additional debt.

Only Costa Rica (‘BB’), Guatemala (‘BB+’) and Mexico (‘BBB’) have lower revenue to GDP ratios than the Philippines.

The global debt watcher said that in the absence of a significant improvement in tax collection, it will not be possible for the Philippine government to implement its ambitious – and much-needed – infrastructure development program.

That, in turn, would jeopardize the country’s medium-term economic growth outlook, and, ultimately, undermine its sovereign creditworthiness.

“Infrastructure development is critical and we would be supportive of that but revenues for that have to come from somewhere,” McCormack said. Fitch currently has a stable outlook on the Philippines and a rating of two notches below investment grade.

Teves, for his part, noted that Fitch Ratings did not include in its projection the revenues that come from privatization, which is part of the government’s revenue target.

The government is aiming to raise a total of P1.12 trillion in revenues this year from both tax and non-tax sources, while total expenditures are expected to reach P1.18 trillion, he said.

“The BIR is hoping to recover P20 billion of its shortfall in the first half while the BOC has committed to wipe out its P13 billion shortfall,” Teves said.

He also reiterated previous statements that the government is pursuing the privatization of big-ticket assets such as the sale of the government’s stake in Philippine National Oil Co.-Energy Development Corp. and San Miguel Corp., which is expected to yield combined proceeds of P100 billion.

Chief News Editor: Sol Jose Vanzi

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