JPMorgan downgrades RP debt papers

BY FELIPE F. SALVOSA II, BusinessWorld Senior Reporter Spooked by the chief tax collector’s statement that this year’s revenue target won’t be achieved, a leading investment bank has downgraded Philippine bonds, pronouncing it riskier to invest in the sovereign debt papers. In a report, JPMorgan moved its recommendation on Philippine bonds to "neutral" from "overweight," or buy. Because all the good news on the government’s fiscal reforms had already been priced in by the market, the Bureau of Internal Revenue’s (BIR) recent pronouncement became a negative factor and "underscores the risk of disappointment," the report said. Philippine bonds, or RoPs, have generated a year-to-date return of 1.9% compared with -0.7% for other emerging markets, but JP Morgan said this was merely due to market trades and not because of a fundamental turnaround in government finances. JPMorgan -- which has been skeptical of the government’s reform initiatives because of implementation issues -- even said that unlike the Philippines, Indonesia deserves to keep its overweight recommendation as the latter "has a more robust credit story." The investment bank pointed to Internal Revenue Commissioner Jose Mario C. Buñag’s statement that the 2006 tax collection target should be lowered to P605 billion from P675.4 billion. Doing so, JPMorgan said, will effectively lower the overall government revenue effort to 14.8% of gross domestic product from the original plan of 16% of economic output. The BIR is supposed to deliver 69% of the 2006 overall revenue target of P975 billion. While it remains to be seen whether the Department of Finance will allow the BIR to have its way, JPMorgan said a lower BIR target will force the government to reduce disbursements to keep its budget deficit target of P125 billion, which is narrower than 2005’s P146.5 billion. But it expressed doubts on whether this strategy will be sustained, considering midterm elections are scheduled next year which could spur more debt to finance expenditures. "All told, this is certainly not good news and we had been concerned about this revenue under-performance," JPMorgan said. Last April, the BIR fell P7.2 billion short of its target P78.6-billion collection, despite the fact that it is traditionally the strongest collection month because of the yearly deadline for income tax payments.