New 'sin tax' law to lift PH credit rating - Barclays

Posted at 02/19/2012 2:01 PM | Updated as of 02/19/2012 2:01 PM

MANILA, Philippines -- Investment bank Barclays Capital said the rationalization of the country’s excise tax policy on sin products particularly, cigarettes and liquor, would be credit positive for the Philippines.

In its Emerging Markets Weekly report, Barclays Capital said the successful passage of the new “sin tax” law would help the Philippines raise much needed revenues to plug the country’s budget shortfall.

The investment bank said there is a need to pursue structural reforms as President Aquino’s commitment not to raise taxes in the first 12 months to 18 months of his term has already expired.

“Successful passage of sin tax legislation under discussion in parliament, we think, would be a clear positive for the sovereign credit profile given the structural boost to government revenue,” Barclays Capital stressed.

Additional revenues from the passage of the new sin tax law would boost revenue generation, raising more funds for the Aquino administration’s Public-Private Partnership (PPP) projects.

“In the meantime, we would look for evidence that the momentum in administrative reforms related to revenue collection does not fade in the coming year,” it added.

House Bill 5727, authored by Rep. Joseph Emilio Abaya of Cavite, seeks to change the current multi-rate specific structure of the excise tax on tobacco and alcohol products by adopting a unitary rate. The panel is set to discuss the bill that could raise an additional P60 billion to the government coffers along with the substitute bill for 10 other sin-tax reform bills.

The proposal seeks to shift to a much simpler structure by adopting a unitary rate which would address problems attendant to the current multi-rate specific structure of the excise tax like unfair tax treatment between and among tobacco and alcohol products.

The bill proposes a three-year transition period in unifying the tax rates on cigarettes and distilled spirits. The tax structure for fermented liquor will be immediately unified on the first year of the reform.

An essential feature of the bill, Abaya said, is the automatic adjustment of the tax rates using the relevant National Statistics Office-established tobacco and alcohol indexes. The adjustment would allow the specific rates to track inflation and maintain the buoyancy of the revenues from this source.

The Aquino government is scheduled to jumpstart capital expenditures for major infrastructure projects under the PPP program this year.

“We expect government capex to rise as project details have now been delineated in the budget. But a risk is that spending remains constrained given corruption-related fears,” Barclays Capital said.

Weak global trade and underspending by the government pulled down the country’s gross domestic product (GDP) growth to 3.7 percent last year from 7.6 percent in 2010. This was lower than the revised GDP growth target of 4.5 percent to 5.5 percent set by the Cabinet-level Development Budget Coordination Committee.

This year, the country’s GDP is seen growing five percent to six percent or lower than the original target of seven percent to eight percent.

“The Philippines remains vulnerable to slowing global growth as it has a relatively high exposure to demand in developed markets and a lack of diversification in its export base,” Barclays Capital said.

The Aquino administration has committed to trim the budget deficit to two percent of GDP starting next year from about 3.9 percent last year.

New York-based Standard and Poor’s (S&P) recently raised the credit rating outlook to positive from stable paving the way for a possible upgrade of the rating that is currently two notches below investment grade within the next six months to 12 months.

With the series of upgrades, London-based Fitch Ratings rates the country’s sovereign credit at one notch below investment grade while New York-based Moody’s Investors Services as well as S&P rate the country’s sovereign credit at two notches below investment grade.