Debt watcher S&P Global Ratings could have upgraded the Philippines’ credit rating this year if not for the eruption of cases involving alleged corruption in the flood control budget, President Ferdinand R. Marcos Jr.’s chief economic manager revealed.

Department of Finance (DOF) Secretary Ralph G. Recto disclosed to reporters on the sidelines of the Senate finance subcommittee’s briefing on the DOF’s 2026 budget proposal that S&P held back on upgrading the Philippine sovereign credit rating from BBB+ to A-.

This comes after Recto cautioned that the proposal to trim the value-added tax (VAT) rate to 10 percent from the current 12 percent could hurt the country’s credit rating.

“If not for this flood control issue, when we met with S&P Global, they were ready to give us a credit rating upgrade. We were already going to move up a notch. It’s a pity,” Recto said on Tuesday, Oct. 14.

Despite this, the Finance chief remains hopeful that the credit rating agency will maintain its current rating and outlook for the Philippines.

On the VAT front, Recto said the rate reduction would erode government revenue collections, which the DOF estimates would drop by an average of ₱300 billion annually. This decline would be equivalent to one percent of the country’s economic output.

Such a revenue loss “will surely impact your credit rating for sure,” Recto stressed.

Sought for his opinion on scrapping the existing rate, Recto said: “Now is not the right time to do it—but I believe in light at the end of the tunnel. So maybe in the future when your debt-to-GDP [gross domestic product] is much lower, we could consider it.”

As a legislator two decades ago, Recto was the principal author and sponsor of the law that introduced the 12-percent VAT rate.

Moving forward, Recto emphasized the need to improve governance in public infrastructure spending, noting that this remains a red flag for debt watchers.

“We have to improve on that, and I’m convinced that we will be able to do it. It will take us a few months to finish all of that,” Recto said.

Meanwhile, Recto remains upbeat that the main tax authorities—the bureaus of Internal Revenue (BIR) and of Customs (BOC)—will hit their collection targets.

In particular, the BIR is targeting to rake in ₱3.22 trillion this year. As of end-August, the main tax agency’s revenue rose by 11.4 percent to ₱2.1 trillion from ₱1.9 trillion in the January-to-August period of 2024.

Meanwhile, the BOC had collected ₱621.4 billion as of end-August. It is tasked to collect ₱958.7 billion for the year.

“There’s a slight dip, but the most important thing is we will still meet our revenue target this year. [Both the BIR and the BOC] will miss theirs by a bit, but non-tax revenues will make up the difference, so overall we will hit our total revenue goal,” Recto explained.

Recto further clarified that “the problem is on the spending side, not on the revenue side.”

Credit ratings assess a government’s creditworthiness and reflect the stability of its finances, which is closely linked to the country’s overall economic performance. As such, credit ratings serve as a proxy indicator of the economy’s health.

An investment-grade credit rating enables the government to secure loans at lower interest rates, which can, in turn, lead to reduced borrowing costs for consumers and businesses. This is because banks often use government-issued debt as a benchmark for setting interest rates on loans.

The Philippines currently enjoys investment-grade credit ratings from the so-called big three debt watchers, which, besides S&P, include Fitch Ratings and Moody’s Ratings.

The Marcos Jr. administration aspires to achieve “A” ratings from all three credit rating agencies before it steps down in 2028.