Tax reform OK seen boost to credit rating

APPROVAL by the House of Representatives of the first tax reform package will help the Philippines’ credit rating, Moody’s Investors Service said in a June 5 note, noting it will provide a fresh stream of funding and showed the government of President Rodrigo R. Duterte can put reforms in place despite persistent political controversies.

“The passage of the bill, dubbed the Tax Reform for Acceleration and Inclusion (TRAIN), is creditpositive because it will address the Philippines’ weak revenue generation,” senior credit officer Christian de Guzman said in a credit outlook yesterday.

“The TRAIN bill will boost revenue and improve the government’s debt affordability, as measured by interest payments as a share of revenue.”

Lawmakers approved House Bill (HB) No. 5636 on May 31 just before it adjourned the first regular session, taking the proposal one step closer to becoming a law. The bill will now have to undergo a fresh round of discussions and approval in the Senate, whose version will then be harmonized with the House counterpart before the measure is submitted to Mr. Duterte for signing into law.

The Philippines currently holds a “Baa2” rating with a “stable” outlook from Moody’s, which is a notch above minimum investment grade. In a previous credit analysis, the debt watcher said the passage of comprehensive tax reform and the “acceleration” of infrastructure development” could raise the country’s creditworthiness.

A higher credit rating means lower borrowing costs for the country.

Under the proposed law, personal income tax rates will be adjusted to shift some burden off lower income segments towards the “ultra-rich,” with those earning P250,000 a year to be exempt from paying taxes. Those earning at least P5 million annually will pay P1.45 million plus 35% of the amount beyond that threshold.

Lower income tax inflows will be offset by higher excise levies on fuel and cars, a P10-per-liter excise tax on sugar- sweetened drinks and the removal of valueadded tax ( VAT) exemptions for several sectors.

However, the House made a last-minute decision to keep cooperatives’ VAT break, while the income tax exemption threshold for bonuses and benefits was

raised to P100,000 from P82,000.

The tax reform’s approval lifted the Philippine Stock Exchange index ( PSEi) on Monday to its highest finish in nearly 10 months at 8,001.38, its best closing since Aug. 10 2016’s 8,051.40.

The PSEi closed at an all-time high of 8,127.48 on April 10, 2015.

PSEi is now up 16.97% yearto-date.

“The market’s breach of the 8,000 level can be attributed to the optimism over the developments in the Department of Finance’s comprehensive tax reform program,” a PSE statement quoted its president and chief executive officer, Ramon S. Monzon, as saying.

Economists have lauded the passage of the tax reform bill, calling it a “positive” step towards raising government revenues and helping unlock greater public spending.

Credit Suisse said in a report last week that the tax measure will likely help bag a rating upgrade for the Philippines, as it pads the state’s low revenue effort which has been the perennial concern among debt watchers.

Although the Philippines has raised the share of revenues to 15.2% of gross domestic product (GDP) in 2016 from 13.4% in 2010, Moody’s said the country remains a laggard when compared to other countries in the “Baa” category.

Some dilutions in the measure will lead to lower collections in its first year of implementation eyed by 2018, but should still yield a net gain for the government and help keep the budget deficit manageable, Moody’s said.

The government is looking to spend P8.4 trillion towards 2022 for infrastructure development, as it seeks to sustain annual GDP growth at 7-8% starting next year.

Beyond the additional funding stream, the credit rater also pointed out that the approval of the tax package also showed the Duterte administration’s resolve in rolling out its planned economic reforms.

“The passage of the tax reform also demonstrates the capacity to implement reform amid the political controversies around the government’s focus on security and the war on drugs,” Mr. De Guzman said.

“Nevertheless, Mr. Duterte has maintained high approval ratings among the electorate, as well as a coalition comprising a strong majority in the House of Representatives, and has leveraged his political capital to push the TRAIN bill through the legislature.”

The bill was passed on third and final reading last week after Mr. Duterte certified the bill as urgent.

The President enjoys high trust ratings according to the Social Weather Stations, with an “excellent” net trust rating in the first quarter of 2017 that has been sustained since he took office at the end of June last year.

Moody’s previously flagged rising “policy unpredictability” as a key risk to the country’s creditworthiness, noting that greater focus on the anti-narcotics campaign and key leaders of the political opposition could distract Congress from tackling more important economic reforms.