PHL credit rating unlikely to be hurt by Mandanas ruling

THE PHILIPPINES’ credit rating is unlikely to be affected by the implementation of a Supreme Court (SC) ruling that expands the local government units’ (LGU) share of the National Government revenue next year, a former Budget chief said.

“The Department of Finance and Department of Budget Management have explained that the additional internal revenue allotment (IRA) grant to local government units will be accompanied by assigning additional responsibilities to LGUs, consistent with the Local Government Code,” Bangko Sentral ng Pilipinas Governor Benjamin E. Diokno said in a Viber message, but clarified that his statement is based on his experience as a former Budget secretary.

“The credit raters will look at the medium- and long-term economic prospects of the country, and its ability to service its debt, based on the country’s fiscal, monetary and structural policies, and its overall strategy moving forward,” he added.

The Supreme Court’s Mandanas ruling is named after Batangas Governor Hermilando I. Mandanas’ successful challenge of the government’s previous position that LGUs were entitled to a smaller share of National Government funds. The government responded to the ruling by devolving more functions to LGUs starting 2022 to compensate for the lost revenue, which will now go towards the LGUs’ IRA.

In June, President Rodrigo R. Duterte signed Executive Order (EO) 138 which transfers a number of basic services to LGUs by 2024. With this, the government is shifting programs and projects, worth an estimated P234.4 billion, to LGUs. 

Credit raters have cited the improvements in the country’s fiscal policies in the past years, which contributed to the improvement in the Philippine sovereign ratings.

S&P Global Ratings in May noted the country saw better quality of expenditure, manageable fiscal deficits, and low levels of general government indebtedness in the past decade. The ratings agency maintained the country’s “BBB+” long-term credit rating with a stable outlook, which means the ratings is likely to be kept for the next 18 to 24 months.

S&P sovereign analyst Andrew Wood said he does not see the implementation of the SC ruling to have a major impact on the general government balance of the Philippines. However, he warned that LGUs may take some time to spend these additional funds as they still need to boost capacity.

“However, it’s likely that local governments will run higher surpluses, against slightly higher National Government shortfalls, for a period of time following the implementation of additional revenue devolution,” Mr. Wood said in an e-mail. 

“This is because the LGUs may take some time to build the additional capacity required to more effectively allocate their new fiscal resources,” he added.

The government expects the fiscal deficit to hit 9.3% of the gross domestic product (GDP) due to pandemic response. This is expected to gradually be lowered to 7.5% and 6.3% of the GDP by 2022 and 2023.

A deficit occurs when a government spends more than the taxes it collects, forcing the state to borrow and increase debt, while a surplus happens when the government is underspending.

World Bank economist Kevin Cruz earlier this month also expressed concern that the implementation of the Mandanas ruling next year “may result to greater underspending, unless the ability of LGUs to effectively spend the additional resources improves.” This could mean “wasted opportunity” while the country is in a crisis, he said.

Meanwhile, International Labor Organization Philippines Country Director Khalid Hassan noted last week that LGUs have different data management systems, so the shift imposed by the EO 138 would require more planning and support.

In January, Fitch Ratings said continued expansion of the government’s revenue base will be a factor that could help the country secure a ratings upgrade.

On the other hand, reversal of reforms that is not in line with a prudent macroeconomic policy framework which could in turn lead to sustained higher fiscal deficits may contribute to a ratings downgrade.

For next year’s proposed P5-trillion national budget, the government is looking to allocate P1.951.3 trillion or 38.8% of the total for automatic appropriations, which includes allocations to LGUs, among others.

For Mr. Diokno, the next administration will have to deal with the implications of the Mandanas ruling.

“They [new administration] should know the new fiscal rules, the emerging national-local fiscal realities and political dynamics. But the [President Rodrigo R.] Duterte administration will reveal the Executive department’s initial response to the Mandanas ruling through its 2022 national budget proposal this coming July,” he said. — Luz Wendy T. Noble with inputs from Beatrice M. Laforga