Dredging the Waters

The Laguna Lake dredging project is a good analogy for what the Aquino administration seeks to achieve with its anti-corruption campaign.

Last month, during the celebrations of Independence Day, PNoy sought to put an emphatic fullstop to the ongoing debate over what to do with a 19 billion peso dredging project involving the Laguna Lake by a Belgian firm which had handled a similar project involving the Pasig River.

In its most elemental form, the project intended to dredge the silt from one part of the lake and dump it on another part. It was cancelled not because the deal was invalid, as the DOJ had determined it had been. Nor was it due to corruption, as the administration did not allege any form of it had taken place (otherwise the OECD Anti-Bribery Convention would have required the filing of cases against those who offered or paid any bribes).

It was cancelled simply because as PNoy had put it, he was “allergic” to such deals, which led the firm to file for damages amounting to 6 billion pesos with the International Centre for Settlement of Investment Disputes. In seeking to dredge the silt from its own spending, the government seems to have delayed, if not cancelled many of its own public works projects in the first half of the year. Applying the same criteria (suspicion of corruption) to PDAF or congressional pork barrel would actually mean cancelling the lot of it.

But this post is not about that issue. Today, it was reported that credit rating agency Moody’s had followed another agency Fitch Ratings in recommending a structural (read: roots-to-branch) reform of the fiscal system. After praising the government for its efforts at consolidation (read: restraining expenditures while improving collections) without resorting to new taxes, it said that

(I)t is unlikely that stricter tax compliance will generate a material change in revenue performance if tax evasion cases are not resolved expeditiously by the country’s inefficient legal system.

So it would seem the efforts towards apprehending tax cheats is similar to the scuttled project that involved dredging the waters of Laguna de Bay in that it takes volumes of silt from one end of the bureaucracy, i.e. the revenue agencies, and dumps them onto another end, i.e. the courts, where they presumably accumulate and clog up the system. Without substantial amounts of spending to upgrade our court system, Moody’s is saying that a significant, permanent improvement to collections is unlikely.

To underscore the scale of the mountain the country has to climb if it wishes to gain an investment grade rating, Moody’s noted that the Philippines which had an average revenue-to-GDP ratio of 14.7% from 2006 to 2010 compared unfavorably with similarly rated peers in its category which averaged 23.7% in that period.

While it recognized the existing proposals to rationalize fiscal incentives and to index sin taxes to inflation as a positive first set of steps, it encouraged the country to go down a path of fiscal reform to improve its “ratings trajectory”. This is probably the loudest endorsement for what we have been espousing in this column.

Considering the problems the government has encountered in rolling out its PPP projects (with the first one being taken off the table), the government has to consider such recommendations seriously. Given the increasingly menacing headwinds coming from Europe, MENA, Japan, China and the US, it will have to find a way to pursue infrastructure and social spending in the future as the period of low interest rates (read: cheap capital from abroad) is bound to come to an abrupt halt.

On Moody’s upgrade of Philippine credit rating

Money bag

Moody’s ups the Philippines’ credit rating, Business Mirror published.

Here is the official statement from the Department of Finance:

A January 6, 2011 press release by the Department of Finance

Manila – Moody’s Investors Service today changed the outlook on the Government of the Philippines’ Ba3 foreign and local-currency bond ratings to positive from stable.  A positive outlook means that a rating may be raised.

Commenting on the outlook change, Finance Secretary Purisima said: “We appreciate the decision of Moody’s to change the outlook of positive from stable. This shows that Moody’s also recognizes the developments in the Philippines. There is no question on our ability or willingness to pay. We have always honored our debts. The Philippine economy has been growing positively for the past 47 quarters. The Philippines was growing even at a time when most of the first world went into crisis and that is strong proof that our credit story is strong.

“But what is more important to us is how the market prices the Philippines. At this time, we are able to borrow at rates a lot lower than the other nations that are similarly rated.”

The good news came on the heels of the rating upgrade from Standard and Poor’s to BB from BB- in November last year. “S&P quickly recognized the improvements in the Philippine credit story and that’s why they upgraded us in November. Our thrust towards intensified revenue collection while maintaining fiscal discipline has gained strong response and increased tax payer compliance. We are strongly committed to fiscal sustainability and consolidation in the near-term.

“The government’s pursuit of continued economic growth and fiscal consolidation is bearing fruits and the international credit rating agencies acknowledge this.

“From a high of 824.78bps in October 2008, the CDS spread for Philippine bonds is now at only 123.67bps as of January 5, 2011.This is proof of strong investor confidence and compares well with peer country Vietnam at 298.85bps and even with higher rated (Ba2) countries such as Turkey at 137.17bps and Indonesia at 125.67bps.”

A credit default swap (CDS) is a form of insurance on a bond or a bond-like security. The rule of thumb is that the better the credit ratings, the lower the CDS spread.

In its latest rating decision, Moody’s cited the strengthening trend in “the Philippines’ external payments position, the successful conduct of monetary policy which has anchored inflation position and helped to lower the government’s cost of funding” as key drivers for the outlook change. Furthermore, “improved prospects for economic reforms will likely have positive effects on government finances, investor sentiment, and economic growth.”

In its press release, Moody’s lead analyst for the Philippines Christian de Guzman cited greater political stability following the “unambiguous outcome” of the Presidential elections as adding impetus to resilient economy growth. Moody’s also noted the notable turnaround in “fiscal management by the Aquino Administration in its first semester in office.”  Moving forward, Moody’s said that its assessment will focus on the government’s commitment to fiscal consolidation and on the successful implementation of the PPP program for infrastructure development.