Wednesday, June 07, 2006
FOREIGN financial institutions have turned cautious about the Philippines’ fiscal outlook moving into the second half of the year.
In a recent report, JP Morgan Chase & Co. has advised its clients to reduce their holdings of Philippine bonds or IOUs after the Bureau of Internal Revenue (BIR) sought to cut its revenue target this year.
“This is certainly not good news and had been concerned about this revenue underperformance,” JP Morgan said.
The US-based financial services company reduced its external debt recommendation from overweight to neutral.
The BIR bid for a lower target prompted JP Morgan to downgrade the country since it adds “potential downside risk to [government bonds].”
“This recent piece of news underscores the risk of disappointment. We thus maintain the view the RoPs [another term for Philippine IOUs] continue to be a trading credit rather than a fundamental credit turnaround story,” the report said.
Earlier, BIR Commissioner Jose Mario Bunag said that the tax bureau’s collection target for the year should be lowered to P602 billion from the original target of P675 billion set by the Development and Budget Coordinating Committee (DBCC).
Bunag said the P602-billion scenario is more reasonable than the programmed goal. The BIR chief’s proposal is only a 10-percent increase over the actual 2005 collection of P542 billion whereas the original goal set is 24 percent higher.
He said some P27 billion in import tax should be shouldered by the Bureau of Customs since this amount involves refined oil products, while P49 billion should be reallocated to the Bureau of Treasury since it concerns withholding taxes from government securities and documentary stamp taxes.
JP Morgan said the possible reduction in the 2006 BIR revenue goal “would effectively lower” the overall revenue effort target to 14.8 percent of gross domestic product (GDP) from the programmed 16 percent. The revenue-to-GDP ratio is a key measure of the health of a country’s finances.
Finance Secretary Margarito B. Teves, however, has turned down the BIR’s request, insisting that any realignment would occur after the May and June collections are tallied.
Assurance sought that revenues, expenditures on track
In a separate report, Bear Stearns & Co. said credit-rating agencies are hesitant about upgrading their outlook and ratings on the Philippines, as they are seeking assurance that revenues and expenditures remain on track in the second half of the year.
“Our principal point to watch for the Philippines is second half expenditure, not revenue collections. This could be another reason that the rating agencies are being cautious in upgrading their outlooks and ratings for the Philippines,” the US-based investment bank said.
Bear Stearns said the frontloading of infrastructure spending in the Philippines should be followed by an offsetting reduction in expenditure in the second half.
Some observers are concerned that President Arroyo might want to continue spending on rural infrastructure in the second half in preparation for next year’s elections.
In February Moody’s Investors Service decided to keep its negative outlook on the Philippines, citing the country’s vulnerability to economic shocks and political risks that results from the very high level of government debt and weak, but improving budgetary performance.
Moody’s said the achievement of revenue targets and overall out turn of the 2006 budget are important considerations before changing the country’s rating outlook back to stable from negative.
For its part, JP Morgan predicted that the Department of Finance will “likely reduce expenditures” to remain on track of its programmed P125-billion budget deficit for 2006.
“But whether this can be sustained into the mid-term elections in May 2007 remains to be seen,” the financial services firm said.
In April the Philippines chalked up a P17.6-billion surplus, five times higher than the P3.3 billion recorded during the same month last year.
This brought the January to April fiscal deficit to P50 billion, lower than the deficit of P60.1 billion incurred in the same period last year.
The fiscal surplus in April was due to lower interest payments and disbursements.
However, the BIR, which accounted for the bulk of revenues, missed its target.
--Likha C. Cuevas and Maricel E. Burgonio
http://www.manilatimes.net/national/2006/june/07/yehey/business/20060607bus3.html
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