EPRA: Fiscal Policy & Tax Administration

RP posts budget surplus in June

2005-07-15T07:47:00.000+08:00

RP posts budget surplus in June
The Philippine Star 07/15/2005

The Philippines had a budget surplus in June, its second in four years, National Treasurer Omar Cruz said yesterday.

The surplus of P246 million followed a P7.6-billion deficit in May and a P2.8-billion deficit a year earlier. The median forecast in a Bloomberg News survey of seven economists was for a P1.2- billion deficit. The P3.3-billion surplus reported for April was the first monthly surplus in exactly four years.

For the first six months, the deficit totaled P67.5 billion, less than the government’s P98.5 billion estimate for the period, Cruz said. That’s 38 percent of the government’s P180 billion estimate for the year.

President Arroyo, whom the opposition is pressuring to resign amid allegations she cheated in last year’s elections, needs to assure investors that her government can cap the deficit after the Supreme Court on July 1 froze a value-added tax law at the center of her plan to avert what she called a "fiscal crisis."

The law, which was passed in May, expanded the tax to fuel, electricity and other previously-exempt products and services. It also allowed the president to raise the rate next year, capped tax credits and raised the corporate income tax, provisions which petitioners told the Supreme Court made the law unconstitutional.

The court, which is hearing oral arguments may rule within a month, according to its spokesman.

Moody’s Investors Service Inc., Standard & Poor’s and Fitch Ratings this week cut the outlooks on their junk debt ratings for the Philippines to negative from stable, citing the suspension of the VAT law and political concerns.

A negative outlook indicates the rating companies are more likely to cut the ratings, which may prompt investors to demand higher yields when the government sells $850 million of bonds later this year.

State of economy to determine GMA’s future — analysts

2005-07-15T07:46:00.000+08:00

State of economy to determine GMA’s future — analysts
The Philippine Star 07/15/2005

President Arroyo has survived the latest battle to oust her over a political scandal but her ultimate fate will hinge on the state of the economy, analysts said yesterday.

Financial and business circles hailed the appointment this week of banker and economist Margarito "Gary" Teves as Mrs. Arroyo’s new finance secretary. But no one underestimates the task ahead of him. One commentator described his job as "the most difficult in Asia."

Unemployment stands at more than 11 percent and over 30 percent of the country’s 84 million people live in abject poverty.

In April the country’s debt reached P3.867 trillion ($68.93 billion), which included $32.14 billion owed to foreign creditors, according to central bank data.

This does not include guarantees worth P598 billion on securities issued by state-run firms like National Power Corp.

Bangko Sentral ng Pilipinas (BSP) governor Amando Tetangco has warned that inflation for this year would likely rise to 7.9 percent compared to the original target of five to six percent.

Debt servicing has risen from 46 percent of government spending in 2002 to 81 percent last year.

Roberto de Ocampo, president of the Asian Institute of Management and a former finance secretary under former President Fidel Ramos, said: "Gary (Teves) is a close friend of mine and I don’t envy him."

Teves replaced Cesar Purisima who resigned from the government on July 8 along with seven cabinet secretaries and two senior department officials. The defections represented the core of Mrs. Arroyo’s financial team.

The President said yesterday she has appointed Romulo Neri from the National Economic and Development Authority as the new budget secretary, replacing Emilia Boncodin.

Mrs. Arroyo has been under attack for weeks over allegations that she cheated in last year’s presidential election and that her family was involved in illegal gambling.

The Asian Development Bank said Wednesday it may cut off new lending to the Philippines if reforms are not pushed through. International ratings agencies Moody’s, Fitch and Standard & Poor’s have downgraded their outlooks on sovereign debt ratings for the country.

Mrs. Arroyo’s own economic reform program is in tatters with the Supreme Court suspending a law to expand the value-added tax, which should have gone into effect on July 1. The opposition challenged the bill as unconstitutional.

"It doesn’t look good," Ocampo told AFP.

"She has very little room to move on the economic front. The problems are still there: widespread poverty, unemployment and lack of investment.

Ocampo said Teves faces an almost impossible task in trying to restore confidence in the economy.

"If he can reverse the Supreme Court’s restraining order on the VAT he will have made a good start but it is just one part of a very big problem."

Street protests would not bring Mrs. Arroyo down, he said, "it will be the economy."

American investment bank JPMorgan in a note to its clients said the focus is now on the suspended VAT law.

Bear Stearns analyst John Stuermer is less pessimistic.

In a note to clients he said both the Bureau of Internal Revenue and Bureau of Customs had managed to generate increased revenue this year — "one thing the Arroyo administration has gotten right this year." — AFP

Arroyo's fate hinges on state of economy, analysts say

2005-07-15T07:44:00.000+08:00

Arroyo's fate hinges on state of economy, analysts say
Posted: 2:43 AM Jul. 15, 2005
Agence France-Presse

PRESIDENT Gloria Macapagal-Arroyo has survived the first battle to oust her over a political scandal but her ultimate fate hinges on the state of the economy, analysts said Thursday.

Financial and business circles hailed the appointment this week of economist Margarito Teves as new financial secretary, but no one underestimates the task ahead of him. One commentator described his job as "the most difficult in Asia."

Unemployment stands at more than 11 percent, and over 30 percent of the country's 84 million people live in abject poverty.

In April the country's debt reached 3.867 trillion pesos (68.93 billion dollars), which included 32.14 billion dollars owed to foreign creditors, according to central bank data.

This does not include guarantees worth 598 billion pesos on securities issued by state-run firms like National Power Corp.

Governor Amando Tetangco of the central bank has warned that inflation for this year would likely rise to 7.9 percent, compared with the original target of 5.0-6.0 percent.

Debt servicing has risen from 46 percent of government spending in 2002 to 81 percent last year.

Roberto de Ocampo, president of the Asian Institute of Management and a former secretary of finance, said Teves "is a close friend of mine and I don't envy him."

Teves replaced Cesar Purisima who resigned from the government on July 8 along with seven other Cabinet members and two senior government officials. The defections represented the core of Arroyo's economic team.

Arroyo has been under attack for weeks over allegations that she cheated in last year's presidential election and that some members of her family were involved in illegal gambling.

Up to 40,000 protesters took to the streets Wednesday to demand her resignation, but analysts say she appears to have weathered the storm for now.

The Asian Development Bank said Wednesday it might cut off new lending to the Philippines if reforms were not pushed through. International ratings agencies Moody's, Fitch, and Standard and Poor's have downgraded their outlooks on sovereign debt ratings for the country.

Arroyo's own economic reform program is in tatters with the Supreme Court suspending a law to expand coverage of the value-added tax (VAT), which should have come into effect on July 1. The opposition challenged the bill as unconstitutional.

"It doesn't look good," de Ocampo told Agence France-Presse.

"She has very little room to move on the economic front," he said. "The problems are still there: widespread poverty, unemployment and lack of investment. Last year the president unveiled a 10-point agenda for economic reform which has made little headway."

Ocampo said Teves faced an almost impossible task in trying to restore confidence in the economy.

"If he can reverse the Supreme Court's restraining order on the VAT he will have made a good start, but it is just one part of a very big problem," he said.

The ultimate victim of street protests would not be Arroyo, he said, "it will be the economy."

American investment bank JP Morgan in a note to its clients said the focus was now on the suspended VAT law.

"The additional revenue was expected to help bring down this year's deficit to 160 billion pesos from a projected 180 billion pesos," the note said.

It added that the VAT suspension "puts this year's deficit ceiling at risk."

Bear, Stearns analyst John Stuermer is less pessimistic.

In a note to clients he said both the Bureau of Internal Revenue and Bureau of Customs had managed to generate increased revenue this year -- "one thing the Arroyo administration has gotten right this year."

He believes the budget deficit for the year could be around 150 billion pesos without the expanded VAT. With INQ7.net

Gov't posted budget surplus in June

2005-07-15T07:43:00.000+08:00

Gov't posted budget surplus in June
Posted: 2:38 AM Jul. 15, 2005
Inquirer News Service

THE GOVERNMENT recorded its second monthly budget surplus this year in June, showing a continued improvement in its fiscal position despite the ongoing political turmoil, the Department of Finance said Thursday.

Helped by better tax collection, saving on interest payments and prudent spending, the government registered a P246-million budget surplus in June.

The finance department said revenue collection in June amounted to P62.036 billion while expenditure reached only P61.79 billion.

In April, the government posted its first monthly surplus for the year of P3.3 billion.

National Treasurer Omar Cruz said the January-June budget deficit amounted to P67.51 billion, P31 billion below the target ceiling of P98.515 billion. Revenue collection during the six-month period amounted to P384.38 billion while expenditure reached P451 billion.

The finance department also reported that government borrowings from January to June amounted to P153.194 billion.

Cruz said that given the January-June results, the budget deficit for the year would likely amount to P150 billion, compared to the target maximum of P180 billion.

"The performance in the first half did not even factor in the VAT [value-added tax]," which has been expanded to include oil, electricity and several other sectors, Cruz told reporters. "With the VAT, we can perform much better."

The Supreme Court has issued a temporary restraining order on enforcement of the expanded VAT law, on a question of constitutionality.

The government is aiming for a zero budget deficit by 2010. Its officials say the target could be met earlier. Michelle V. Remo, with INQ7.net

First-half deficit below ceiling; another surplus posted in June

2005-07-15T07:23:00.000+08:00

First-half deficit below ceiling; another surplus posted in June
BY KARL LESTER M. YAP, Reporter
Business World Online

The government’s efforts to rein in its massive budget deficit appear to be having some success, with latest figures showing it has bettered its deficit target for the first half.

The government reported a surplus of P246 million for the month of June, the second this year after a similar surplus last April. The surplus is a reversal of last year’s P2.767 billion deficit.

"I think this record surplus is quite a feat. The last time [the] government posted a surplus for the month of June was in 1987," National Treasurer Omar T. Cruz told reporters.

In the first half, meanwhile, the budget deficit stood at P67.511 billion, down from the P80.12 billion shortfall in the same period in 2004, and well below the semester’s cap of P98.515 billion.

Mr. Cruz attributed the better-than-expected surplus to tightened spending and improved tax collection.

"The lower-than-programmed deficit was a result of better revenue collections, savings in interest payments, and prudent spending," he explained.

"Some P14.9 billion savings in interest payments were realized due to lower cost of borrowings," Mr. Cruz added.

The improved year-to-date deficit caused the peso to strengthen to a two-week high against the dollar. It averaged at P55.997 and closed at P55.88 or 27 centavos higher from Wednesday,

Government officials have said they expect the budget deficit to come in at just P150 billion this year, from an original P180-billion target, and to drop to P89 billion next year due to the expanded value-added tax (VAT).

The target is now in question as on July 1, the Supreme Court stopped the implementation of the VAT law, the core of the Arroyo government’s fiscal reform agenda aimed at reducing the state’s chronic budget deficit.

The suspension of the VAT, coupled with the ongoing political uncertainties, resulted in three global credit rating agencies cutting the country’s debt outlook to "negative" from "stable."

London-based Fitch Ratings and Standard & Poor’s Ratings Services and US-based Moody’s Investors Services all said the e-VAT law suspension, plus heightened political tension amid clamors by various political and civil groups for President Gloria Macapagal Arroyo to resign, are threatening the country’s capability to sustain fiscal consolidation.

But Mr. Cruz said the deficit target is still "easily achievable" even without the VAT.

"Despite having had a TRO [temporary restraining order] impede on additional revenues, if we continue this momentum, we will be doing much better than planned," Mr. Cruz said, pointing out that the government is already P31.5 billion ahead in its deficit.

The VAT law was expected to generate some P25 billion to P30 billion in additional revenues this year, and P80 billion to P105 billion next year.

Based on Finance records, the Bureau of Internal Revenue (BIR) collected P38.581 billion in June, up from P35.942 billion last year.

This brings total revenues from the BIR for the first half to P260 billion, up from P229.2 billion last year, but short of the P265.39 billion programmed.

The Bureau of Customs generated P12.6 billion, the Bureau of the Treasury P7.438 billion, while other government offices added P3.414 billion.

Mr. Cruz also pointed out that the Bureau of the Treasury is 25% ahead of its borrowings.

"That means I’m ahead by a quarter," he said.

As of June, the government had already borrowed P153.194 billion, beyond the programmed P124.269 billion for the first six months.

"Net foreign borrowings amounted to P97.4 billion, which includes the issuance of $1.5 billion and $750-million global bonds in February and May, respectively, while domestic borrowings amounting to P55.8 billion with short-term treasury bills paying its maturing obligations during the period," Mr. Cruz said.

Country able to repay debt despite crisis, says treasurer

2005-07-14T08:20:00.000+08:00

Country able to repay debt despite crisis, says treasurer
The Philippine Star 07/14/2005

The Philippines is fully capable of repaying its foreign debt despite the political turmoil and a recent string of warnings from credit rating agencies, National Treasurer Omar Cruz said yesterday.

Earlier Moody’s Investors’ Service Inc. followed action by two other major rating companies – Fitch and Standard & Poor’s – and cut the outlook on the Philippines’ sovereign B1 rating to negative from stable, citing the possibility of negative consequences the country’s political problems may have on the budget and external payments.

Cruz stressed that the Philippines won’t default on any of its bonds or other debt.

"It’s far from happening. I know fully well the government’s debt maturities," Cruz said. "I don’t think (Moody’s move) is reasonable at this point."

Latest available data from the Central Bank shows the Philippines’ public foreign debt – which accounted for roughly two-thirds of the country’s total foreign debt of US$55.3 billion (euro45 billion) at the end of March – had an average maturity of 20 years.

Moody’s decision was the latest bad news for the country’s economy, already beset by a gaping budget deficit and a Supreme Court freeze ruling last month to freeze implemenation of an expanded value added tax aimed at balancing the budget by 2010. Opponents claim the broadening of the VAT tax is unconstitutional since it was not approved by lawmakers.

The Philippines’ main stock index fell 0.8 percent to 1,854.04 Wendesday as investors worried about the protracted crisis over allegations President Gloria Macapagal Arroyo cheated in last year’s election. Last week, 10 of Arroyo’s Cabinet members – led by her economic team – stepped down and urged her to do likewise.

Cruz also said the government will be relentless in pursuing fiscal reforms and will work to convince the Supreme Court to lift the suspension of the VAT law.

Arroyo’s spokesman, Ignacio Bunye, said in a statement that the country’s economic fundamentals "remain solid, particularly on the matter of improving our fiscal condition.

"The fate of our economic reform agenda, however, is mainly pinned on the e-VAT law and this is the reason why we are determined to remove all the legal obstacles to its implementation." — AP

Junk petition vs EVAT, SC asked

2005-07-14T08:03:00.000+08:00

Junk petition vs EVAT, SC asked
By Jose Rodel Clapano
The Philippine Star 07/14/2005

Acting in behalf of the government, the Office of the Solicitor General asked the Supreme Court yesterday to junk a petition seeking to permanently stop the implementation of the expanded value-added tax (EVAT) law.

The petition was filed earlier this month by opposition congressmen led by House Minority Leader Francis Escudero and the Petroleum Dealers Association (PDA).

Those opposed to Republic Act 9337 or the EVAT law failed to show a "clear and unequivocal breach of the Constitution," Assistant Solicitor General Antonio Villamor said in a 150-page comment submitted to the Supreme Court (SC).

Villamor said the four consolidated petitions of the opposition congressmen and the PDA against EVAT should be dismissed for lack of merit because they "collectively or separately failed to unequivocally cast doubt on the validity of RA 9337, much less prove any violation of the Constitution beyond reasonable doubt," Villamor said.

He also asked the high tribunal to immediately lift the temporary restraining order (TRO) it issued on July 1 against the implementation of the EVAT, centerpiece of the Arroyo administration’s fiscal reform agenda.

The SC is set to hear oral arguments on the constitutionality of the EVAT at 1 p.m. today.

Meanwhile, presidential adviser for political affairs Gabriel Claudio denied allegations that President Arroyo may have influenced the SC to issue the TRO against the EVAT law implementation.

Claudio also denied claims that the President asked the SC to issue the TRO as a form of "political reprieve," saying such insinuations could invite contempt raps from the SC if those raising the claims fail to substantiate their allegations. "There is no truth to that (claim)," he said.

"In fact, one of them (resigned finance secretary Cesar Purisima) is being required by the Supreme Court to explain under the possibility of contempt of court to show what was meant by certain remarks that tended to insinuate the Supreme Court was influenced by outside factors, or outside sectors," Claudio told a media forum.

He said the SC would naturally "resent and not take sitting down" any allegations that outside forces somehow influenced their decision.

The SC has given Purisima five days to explain why he should not be cited for contempt for his reported claims that Mrs. Arroyo pressured the court to issue a TRO against the EVAT law in the face of mounting political pressures against her.

"For the record, Malacañang and the President never intervened in the action of the Supreme Court for a TRO," Claudio said. "I think the action of the government in the next several days would be proof of the determination of Malacañang to dispute or to work against the TRO, let alone any move for an injunction on the implementation of the EVAT."

He said the EVAT law is something Mrs. Arroyo herself and members of her Cabinet had threshed out exhaustively: "We are not just about ready to see its non-implementation because of the cases or the petitions filed by the opposition."

"The issue being raised by some of our former colleagues (in the Cabinet) about the EVAT as the reason for their resignation is without basis," he added.

Purisima had earlier claimed that Mrs. Arroyo expressed her desire to delay the EVAT implementation, citing the mounting resignation calls against her.

He did not, however, directly accuse Mrs. Arroyo of trying to influence the SC in handing down the TRO.

Malacañang described Purisima’s claims as "preposterous" and Palace spokesman Ignacio Bunye said the President made the political gamble of pushing for the EVAT implementation at the expense of her popularity.

Other Cabinet members also defended the President and denied claims that she influenced the SC to delay the EVAT implementation until the political crisis has abated.

Justice Secretary Raul Gonzalez agreed such accusations could amount to contempt of court and added it would be unfair to accuse Mrs. Arroyo of having influenced the SC to issue the TRO.

Foreign Affairs Secretary Alberto Romulo and Speaker Jose de Venecia Jr. said Mrs. Arroyo would not have risked precious political capital on the EVAT passage just to have it stopped.

Deputy spokesman and Secretary of the Cabinet Ricardo Saludo said the implementation of the EVAT had long been a priority for the President.

He also said the government would not risk an adverse market reaction by having the EVAT frozen immediately after it went into effect.

De Venecia said Mrs. Arroyo had exerted strong political will in having the VAT passed by Congress.

But critics insisted that Mrs. Arroyo could have influenced the high court in the same way that she admitted to talking with an election official during the May 10, 2004 vote count.

"Was it impossible that GMA (Mrs. Arroyo) called the SC justices? Would you blame Purisima when he speculated (on that)?" former senator Rene Saguisag said.

He cited reports quoting De Venecia as saying that he "talked to the justices individually" when the SC was still deliberating on the Mining Act, which was favorably acted upon by the high court.

"If they (the SC) want to cite Purisima for contempt, why didn’t they cite JDV (De Venecia) for contempt first?" Saguisag said.

"If he (De Venecia) can do that, don’t you think GMA can do that also? JDV must also be cited for contempt. To me, this has a chilling effect," he said. Unconstitutional?
Escudero, several opposition congressmen and the PDA earlier said the bicameral conference committee violated the Constitution by inserting amendments in the Senate and House versions of the VAT bill.

These changes include, among other things, the removal of VAT exemptions for domestic air carriers and electricity producers.

Escudero and the petroleum dealers also cited the deletion of the "no pass-on provision" that prohibits passing along the VAT on the sale of petroleum products and electricity to consumers, which would have lessened the burden on the people.

He said RA 9337’s provision granting the President "standby" authority to raise the EVAT to 12 percent negates Congress’ exclusive power to tax.

Villamor said the committee had the prerogative to make amendments to the bills noting that an entirely new bill emerging out of a conference committee is not a remote possibility.

"If the opposition legislators wanted to restrict the powers of the bicameral conference committee, they should have raised the matter before Congress," he said. "The extensive changes in a House Bill and in the Senate may result in the rewriting of the whole bill and the possibility of a third version is not remote when the bill is elevated to the bicameral conference committee."

Villamor also struck down as misleading and wrong the opposition congressmen’s claim that the difference in the "no pass-on provisions" in the House Bill was not significant and should not be reconciled.

He said that the House version barred the passing on of VAT for petroleum products to consumers while the Senate version dealt with the sale of electricity.

"There was clearly a conflict and the variance is not at all minuscule... Clearly, the deletion of the pass-on provision is within the prerogative of the bicameral conference committee," Villamor said.

As regards to the contested provision that placed a 70-percent cap on input VAT, Villamor noted that the committee’s decision to have the measure included in the law "did not violate the Constitution even if the said provision was not contained in the House and Senate versions."

"The inclusion of the amendment to Section 110 (B) of the NIRC (National Internal Revenue Code) is well within the authority of the bicameral conference committee. Consequently, the inclusion of the amendment... is valid and constitutional," Villamor said.

He also downplayed allegations by Escudero and the Petroleum Dealers Association that RA 9337 gave the President the authority to raise the tax rate.

"Congress did not give the President any power of legislation. They only direct the president to implement the VAT rate increase to 12 percent on January 1, 2006 when any of the two conditions set by Congress is satisfied," Villamor said.

Earlier, the DOF, BIR and Executive Secretary Eduardo Ermita asked the SC to immediately lift the TRO against the EVAT and require Escudero and the PDA to pay a hefty P130 million per day that the TRO is implemented, until the case is resolved.

Malacañang also said it was determined to win the legal battle for the implementation of the EVAT law, calling it the linchpin of the government’s economic reform agenda.

Press Secretary Ignacio Bunye said that while the country’s economic fundamentals remain solid, particularly its fiscal position, the government is determined to remove all legal obstacles to the EVAT’s implementation.

"Our determination to win the legal battle on the implementation of the EVAT law and our focus in putting our fiscal house in order will be our strong points in eventually regaining the positive outlook of the international business community," Bunye said.

Mrs. Arroyo’s determination to remove all obstacles to the EVAT law, according to Bunye, should remove all perceptions that she had a hand in the Supreme Court decision to issue a TRO to defuse public anger over rising prices.

The EVAT law is among the tax reform measures adopted by the government to make up for the country’s huge fiscal deficit as well as fund basic programs on vital infrastructure, education, health and microfinance.

Despite the prevailing political crisis, Trade Undersecretary Elmer Hernandez said he believed the country would still come out stronger as an investment destination because investors would view Filipinos as politically mature if they follow the constitutional process and the rule of law.

"We are coming out stronger because investors are calling for political stability and… an indication of political stability is the sense that there is no people power and the institution is working, that is an indication of political stability," Hernandez said.

Bangko Sentral ng Pilipinas Gov. Amando Tetangco, meanwhile, said the country’s gross domestic product is expected to grow around five percent this year, affected by the rising prices of crude and the global economic slowdown.

Tetangco’s GDP forecast is lower than the government’s 5.3 percent to six percent prediction.

Despite all the political noise, however, the peso strengthened on Tuesday against the dollar on the back of what traders said was "relative political stability."

The local currency averaged P56.124 against the dollar or 9.6 centavos stronger from last Monday.

The Philippine Stock Exchange composite index on Tuesday increased 16.16 points to 1,868.94, with turnover reaching 164.9 million shares valued at P994.6 million. – With reports froms Paolo Romero, Sandy Araneta, Delon Porcalla

Moody's mood negative on RP; ADB warns Manila

2005-07-14T07:56:00.000+08:00

Moody's mood negative on RP; ADB warns Manila
First posted 01:12am (Mla time) July 14, 2005
By Doris C. Dumlao
Inquirer News Service

THE POLITICAL crisis yesterday continued to take its toll on the economy with Moody's Investors Service downgrading its credit outlook rating on the Philippines to negative from stable and the Asian Development Bank (ADB) warning it may cut off new lending to the country.

Moody's Investors Service on Wednesday became the third credit rating firm in three days to cut its outlook on the Philippines, saying reforms to cut the budget deficit had been thrown into doubt by the political crisis.

The ADB made no direct reference to the crisis facing President Gloria Macapagal-Arroyo but said its board had approved a three-year program to 2007 under which "new lending could range from zero to as much as $1.5 billion, depending on the pace of fiscal consolidation and key sector reforms."

Leadership gap

Even so, Bangko Sentral ng Pilipinas Governor Amando Tetangco played down fears that fiscal reforms will slip.

"The government has moved quickly to fill up the vacated posts of secretary of finance and heads of revenue-collecting agencies," Tetangco said.
"This eliminates the leadership gap in these offices and should allow continuity of the fiscal improvements seen earlier this year and the reform program going forward," he added.

The peso weakened on increased dollar buying on the political uncertainty, finishing at 56.15 to the US dollar on the Philippine Dealing System, down from 56.11 on Tuesday. The benchmark 30-company Philippine Stock Exchange Index also dropped 14.90 points, or 0.8 percent, to 1,854.04 after rising 0.9 percent on Tuesday.

"The market's fate remains as uncertain as the country's political situation," said AB Capital Securities research head Jose Vistan.

Most severe

Moody's said the resignation last week of Ms Arroyo's economic team, including Finance Secretary Cesar Purisima, raised doubts about her administration's ability to maintain an improvement in the country's fiscal performance.

"Should there be a prolonged weakening of government effectiveness, or a change in government, future fiscal and external debt policies could be very different from that taken by the Arroyo government so far," Moody's said in a statement.

The agency, whose rating of Philippine sovereign debt is the most severe at four notches below investment grade, cut the outlook on its B1 long-term foreign- and local-currency ratings to negative from stable.

The move was similar to outlook changes made by Standard & Poor's and Fitch Ratings on Monday, with all three agencies citing the crisis facing Ms Arroyo over allegations of electoral fraud and of graft involving members of her family.

The downgrading of the outlook on the country is expected to result in a further cut on the country's credit rating, which would raise borrowing costs for Manila. The Arroyo administration relies on the global bond market to raise about $4 billion a year to cover its chronic budget deficits.

Moody's said the Supreme Court's decision to freeze the expanded value-added tax (VAT), the centerpiece of Ms Arroyo's efforts to raise state revenues and plug the budget deficit, suggested politics could derail reforms.

Moody's cited concerns that the political turmoil "might have negative consequences on the budget and external payments position."

Vulnerable to shocks

With a large buildup in public-sector debt and external debt making the country vulnerable to shocks, the departure of Ms Arroyo's top economic officials "casts doubt on the ability of the administration to preserve the recent improvement in the government's fiscal performance," Moody's said.

The government stands to lose an estimated P5 billion a month unless the high court reversed its temporary restraining order on the VAT law.

Opposition lawmakers had contested the new VAT law, saying it was unconstitutional because it allowed the President to raise the rate to 12 percent from 10 percent next year. The Supreme Court is due to hear the case today and a tribunal spokesperson said a ruling could come this month.

Prior to the court freeze, the government had estimated that this year's budget deficit could fall to P160 billion against the target of P180 billion, or 3.4 percent of gross domestic product. The fiscal shortfall in 2004 was P187 billion, equal to 3.9 percent of GDP.

ADB warning

ADB vice president Joseph Eichenberger told the executive board the new strategy "acknowledges the complex political economy of the Philippines and how this affects the pace and quality of reforms.

"To accommodate the associated uncertainty, and in a clear break with past practice, the ADB has not included specific annual lending targets within its overall three-year envelope of possible financial support," he added.

Eichenberger said the ADB, which lent about $200 million to Manila last year, could not pursue a "business as usual approach."

He said loan processing "will not be allowed to run ahead of the political, macroeconomic and sector supports" necessary to ensure the success of projects.

The ADB said its financial support levels starting in the 2005 fiscal year "will be contingent on significant front-loading of the fiscal consolidation process, backed by an enhanced tax effort to ensure the sustainability of economic reforms."

National treasurer

National Treasurer Omar Cruz said the Philippines was fully capable of repaying its foreign debt despite the political turmoil and a recent string of warnings from credit rating agencies.

Cruz stressed that the government would not default on any of its bonds or other debt.

"It's far from happening. I know fully well the government's debt maturities," Cruz said.

Latest available data from the Central Bank shows the Philippines' public foreign debt -- which accounted for roughly two-thirds of the country's total foreign debt of $55.3 billion (euro45 billion) at the end of March -- had an average maturity of 20 years.

Relentless reforms

Cruz also said the government would be relentless in pursuing fiscal reforms and would work to convince the Supreme Court to lift the suspension of the new VAT law.

He acknowledged that the concerns expressed by the credit rating firms were valid.

"Government posts are filled up now, so they are now given the mandate to get on and continue the momentum made all this time ... The gaps in leadership in key areas have been addressed," he pointed out.

On Tuesday, Ms Arroyo appointed Margarito "Gary" Teves -- a respected bank president, economist and former congressman -- as finance secretary.

Teves said his immediate goal was to improve tax collection to avert the potential revenue loss if the Supreme Court's freeze of a broad sales tax was not lifted.

The American-educated economist has inherited an economy where the outstanding debt, as of April, ran to P3.867 trillion, including P32.14 billion owed to foreign creditors, according to central bank data.

No illusions

Teves said he had no illusions about the job. "I know it won't be easy but it is possible to turn things round."

Press Secretary Ignacio Bunye said economic fundamentals remained sound and the government was determined to remove legal obstacles to implementation of the VAT law.

The American Chamber of Commerce said the crisis "severely impacts on the ability of the current administration to govern effectively."

"We urge Filipinos to resolve this crisis at the earliest possible time, within the rule of law and the Philippine Constitution," it said in a statement.

Industry-specific VAT input caps eyed by gov’t

2005-07-14T07:49:00.000+08:00

Industry-specific VAT input caps eyed by gov’t
Proposed benchmarks expected in three months
BY FELIPE F. SALVOSA II, Senior Reporter
Business World Online

Getting down to work, newly appointed Finance Secretary Margarito B. Teves wants to do away with a single cap on input tax claims under the new value-added tax (VAT) law, instead proposing to set "benchmarks" for specific industries.

Mr. Teves told reporters that the law’s 70% cap on input VAT, or VAT paid for production inputs which companies can deduct from their VAT obligations, may not work across all industries because of varying profit margins.

The outgoing Land Bank of the Philippines president said he would ask the tax bureau and business groups to sit down and produce a study outlining their recommendations within 60 to 90 days.

"Instead of having one common figure which is 70%, we can have variable figures depending on the needs [of the industries]," he said. For example, traders may not have a big profit margin compared with manufacturers, Mr. Teves noted.

"What probably will be helpful is [for] industry and [the tax bureau] and other agencies to work together to come up with a consensus, preferably a time bound study [within] 60 to 90 days and come up with a decision for implementation," he said.

Businessmen have complained that a 70% cap on input VAT would force them to pass on the remaining 30% to consumers and result in skyrocketing prices. A group of Shell gas station owners have brought the matter to the Supreme Court, which issued a temporary restraining order last July 1.

Giving in to the clamor, the Finance department decided to suspend the computation of the 70% cap until yearend, to give time to Congress to amend the provision.

Finance officials are considering raising the cap to 90%.

Finance Assistant Secretary Gil S. Beltran said input-output tables prepared by the National Statistics Office could be a good basis to set industry benchmarks for input VAT. The input-output tables are based on surveys and will be an objective measure, he added.

RP credit rating downgraded

2005-07-12T08:43:00.000+08:00

RP credit rating downgraded
The Philippine Star 07/12/2005

The political crisis gripping the nation continued to take its toll on the economy yesterday, with two major international credit rating agencies revising their outlooks on the country from stable to negative.

The country’s financial markets likewise took a beating.

Fitch Ratings and Standard & Poor’s (S&P) both cited heightened political uncertainty and the Supreme Court’s order freezing the implementation of the expanded value-added tax (EVAT).

"A rating downgrade could be triggered by protracted delays in the Supreme Court decision, an eventual decision that the expanded value-added tax legislation is unconstitutional, or continued political disorder," Fitch said in a statement.

It affirmed the Philippines’ long-term foreign and local currency ratings at ‘BB’ and ‘BB+’, respectively. The short-term foreign currency rating remained at ‘B’ and country ceiling at ‘BB’.

S&P said it affirmed the ‘BB-/B’ foreign currency and ‘BB+/B’ local currency ratings on the sovereign.

"Failing a timely resolution of the leadership crisis, risk perceptions toward the country are set to increase, ultimately putting pressure on the ratings at the current level," it said.

The rating revisions highlighted "concerns over the country’s ability to maintain the fiscal consolidation needed to reduce its high level of public and external indebtedness."

"This concern stems from the ongoing political crisis in the country — sparked by allegations of electoral impropriety by the President, and punctuated by the Supreme Court’s freezing of the expanded sales (value-added) tax, and the departure of President Arroyo’s economic team," S&P said in a statement.

"The combination of delayed fiscal consolidation, protracted political stalemate, and a possible change in economic policy has shifted the balance of risks onto the downside, making a stable outlook no longer justified."

Fitch’s rating downgrade comes 46 days after the outlook was raised and suggests Fitch is more inclined to lower the Philippines’ long-term foreign currency rating of BB, two levels below investment grade, and local currency rating of BB+.

S&P’s rating for the nation is three levels below investment grade and that of Moody’s Investor Service is four levels below.

A lower rating outlook may increase financing costs for a government that uses a third of its budget on payments of interest, said Theresa Marcial Javier, an investment manager at Bank of the Philippine Islands.

"The rating downgrade will further add to the already negative sentiment in the Philippines," said Javier. "Yields on government bonds will rise."

National Treasurer Omar Cruz said the government will stick to its borrowing plans.

Cruz stressed that other fiscal reform measures remained in place and the country’s economic fundamentals have not changed. The government still has a "comfortable cash position" and it will take necessary steps to prevent borrowing costs from rising too sharply, he said.

James McCormack, Fitch Ratings head of Asia sovereign ratings in Hong Kong, said the company will further cut its ratings should the Supreme Court rule the EVAT law to be unconstitutional.

Prolonged political uncertainty may also trigger a downgrade. "Right now, politics in the Philippines is all about survival and survival of the President," McCormack said. "Politics in the medium term is too unstable. We’ve got concerns about what that means for the economy and policy."

Malacañang said the decision of the rating agencies was only a "temporary setback."

Press Secretary Ignacio Bunye said the delay in the EVAT’s implementation would not derail the government’s fiscal targets.

"The Arroyo administration remains steadfast in pursuing its commitments to institute the reform programs," he said, adding that the Supreme Court had said it would rule on the EVAT within 30 days.

Acting Finance Secretary Roberto Tan, who was appointed July 8 after Cesar Purisima resigned along with nine other Cabinet members and called for Mrs. Arroyo’s resignation, said the downgrades were "uncalled for," adding that the government can achieve its P180-billion budget deficit forecast for this year even without changes to the expanded VAT.

Purisima earlier said he expected the deficit would be no more than P160 billion this year, after P187 billion in 2004, helped by the planned changes in the VAT and a clampdown on tax evasion. The deficit would probably narrow to P101 billion in 2006, P72 billion in 2007, P21 billion in 2008 and P4 billion in 2009, he said.

On July 1 the Supreme Court stopped the implementation of the EVAT law, the core of the Arroyo government’s fiscal reform agenda aimed at reducing the state’s massive budget deficit.

"The (court’s) temporary restraining order was a major setback for the centerpiece of the government’s fiscal reform program, especially given that no time frame has been set for a court decision," said McCormack. "The EVAT is critical to enhancing the Philippines’ medium-term fiscal prospects and improving its public debt sustainability."

The law keeps value-added tax at 10 percent but expands its coverage to include other previously exempt sectors such as fuel and electricity.

It also gives the President the authority to raise the Vat by two percent in 2006, under certain economic conditions. This authority was challenged by the political and business groups that filed the petition before the high court.

Fitch said it was questionable in the context of the current political turmoil whether the weakened leadership would commit the necessary political capital to resolve the tax issue soon.

It said the political situation may prove detrimental to the country’s broader economic performance, as well as consumer and investor sentiment and developments in financial markets.

The President is facing mounting calls to resign and an impeachment complaint has been filed against her in Congress over allegations she cheated her way to victory in last year’s presidential election.

Mrs. Arroyo has apologized for what she described as a "lapse in judgment" in phoning an election commissioner during the vote count but denies trying to cheat and refuses to resign.

"The best scenario would be for her critics and the public to forgive her and simply move on but this is highly unlikely and leaves impeachment as the only constitutional option," said Jose Vistan of AB Capital Securities.

Vistan said impeachment "would be a protracted battle that could keep investors away and drag (down) the economy."

ING Financial Markets, in a note, said the refusal of the Catholic Bishops Conference of the Philippines to be dragged into the political conflict and the support of key politicians such as former President Fidel Ramos and Vice President Noli de Castro would give Mrs. Arroyo some time to consolidate her position.

"But the overall state of national politics remains fragile and will weigh on the financial markets until the issues of corruption and election irregularity are resolved," ING said. — With Aurea Calica, AFP, AP

RP downgraded by SP, Fitch on political uncertainty

2005-07-12T08:40:00.000+08:00

RP downgraded by SP, Fitch on political uncertainty
Posted: 9:41 PM Jul. 11, 2005
Agence France-Presse with Inq7.net

THE POLITICAL crisis took its toll on the Philippine economy Monday, with two international ratings agencies revising their outlook on the country to negative from stable.

Stocks closed 1.25 percent lower and the peso weakened to 56.220 against the dollar at the close of trading just above its all-time low of 56.45.

International ratings agencies Standard and Poors and Fitch Ratings said separately their outlook downgrade of the Philippines reflected prevailing political uncertainty and a Supreme Court ruling which stopped the government collecting a crucial consumption tax.

Standard and Poor's cited concern at the government's ability "to maintain the fiscal consolidation" needed to trim its high level of debt.

"This concern stems from the ongoing political crisis in the country," sparked by allegations of electoral fraud against President Gloria Macapagal-Arroyo, it said.

The resignation of 10 cabinet members last Friday, including most of Arroyo's economic team, also weighed on sentiment.

"Failing a timely resolution of the leadership crisis, risk perceptions toward the country are set to increase, ultimately putting pressure on the ratings at the current level," Standard and Poors said, affirming the sovereign ratings at BB-minus/B for foreign currency and BB-plus/B for local currency.

Fitch affirmed the Philippines' long-term foreign and local currency ratings at BB and BB-plus, respectively. The short-term foreign currency rating remained at B and country ceiling at BB.

Fitch warned that a full rating downgrade "could be triggered by protracted delays in the Supreme Court decision, an eventual decision that the expanded value-added tax legislation is unconstitutional, or continued political disorder."

Arroyo is facing mounting calls to resign and an impeachment complaint has been filed against her in Congress over allegations she cheated her way to victory in last year's election.

She has apologized for a lapse of judgment in phoning an election commissioner during the vote count but denies trying to cheat and refuses to resign.

"The best scenario would be for her critics and the public to forgive her and simply move on but this is highly unlikely and leaves impeachment as the only constitutional option," said Jose Vistan of AB Capital Securities.

Vistan said impeachment "would be a protracted battle that could keep investors away and drag [down] the economy."

ING Financial Markets, in a note, said the refusal of the influential Roman Catholic church to be dragged into the political conflict and the support of key politicians such as ex-president Fidel Ramos and Vice President Noli de Castro would give Arroyo some time to consolidate her position.

"But the overall state of national politics remains fragile and will weigh on the financial markets until the issues of corruption and election irregularity are resolved," ING said.

On July 1 the Supreme Court suspended the implementation of a new value-added tax (VAT) law aimed at reducing the state's massive budget deficit.

The decision was a "major setback" for government's fiscal reform program, said Fitch's senior director James McCormack.

Supreme Court to issue ruling on new VAT law within a month

2005-07-12T08:38:00.000+08:00

Supreme Court to issue ruling on new VAT law within a month
Posted: 9:39 PM Jul. 11, 2005
Cecille Yap
XFN-Asia with Inq7.net

(UPDATE) THE SUPREME Court said the new value-added tax (VAT) law, the implementation of which it ordered stopped, is now the court's top priority, and said it will decide on the law's constitutionality within a month.

In a statement, Ismael Khan, the Supreme Court spokesman, said the court is well aware of the economic anxieties concerning the early resolution of the case.

This, he said, is evident in the court's decision to fast-track the resolution of the VAT case by bringing forward the oral arguments to Thursday, or almost two weeks earlier than original scheduled.

A decision by the Supreme Court will most probably be forthcoming within a month, he said.

Khan also denied accusations that it was President Gloria Macapagal-Arroyo who asked the Court to issue the temporary restraining order preventing the implementation of the law for the purpose of easing the current political tension.

"The Court simply, and as a matter of course, acted on the four petitions filed by four consumer and political groups questioning the legality of the VAT law," Khan said.

In a related development, Malacañang has assured credti ratings firm Fitch Ratings that the temporary restraining order on the VAT law was just "temporary setback" and would not affect the fiscal targets of the government.

Press Secretary Ignacio Bunye was reacting to Fitch's having changed its ratings outlook from stable to negative due to concerns over the VAT law.

The new law, enacted in May, keeps the VAT rate at 10 percent, but it removes the exemption enjoyed by the oil, electricity and transport sectors. It also gives the president authority to raise the rate to 12 percent from January next year.

The law also raises the corporate income tax rate to 35 percent from 32 percent.

SC: No Arroyo influence on e-VAT freeze

2005-07-12T08:31:00.001+08:00

SC: No Arroyo influence on e-VAT freeze
First posted 03:35am (Mla time) July 12, 2005
By Armand N. Nocum, Gil C. Cabacungan Jr.
Inquirer News Service

THE SUPREME Court yesterday denied allegations that President Gloria Macapagal-Arroyo influenced it into stopping the implementation of the expanded value-added tax (e-VAT).

In a statement, the high court debunked accusations . . . that Ms Arroyo prevailed over the Supreme Court to issue a temporary restraining order against the e-VAT for the purpose of defusing the tense political situation."

"The court simply, and as a matter of course, acted on the four petitions filed by four consumer and political groups questioning the legality of the e-VAT Law," it said.

Senate President Franklin Drilon had earlier told the Inquirer that a "rumor" that Ms Arroyo had a hand in the TRO was the "tipping point" that prompted seven Cabinet members and three agency heads led by Finance Secretary Cesar Purisima to resign Friday.
Drilon said the
Cabinet members felt the President would make compromises and sacrifice vital reforms like the e-VAT, the centerpiece of Ms Arroyo's economic reform program, to ensure her political survival.

Falsely accused

Senator Joker Arroyo slammed Drilon for his allegation against the Supreme Court.

"No responsible member of the bar has ever dared in the past to suggest that anyone, not even the President, can lasso a big bloc of justices to vote the way the President wants it," Arroyo said in a statement.

"It is just statistically impossible. Yet the Supreme Court has been irresponsibly dragged and falsely accused in the current political crisis," the senator said.

Arroyo noted that 13 justices (86 percent) voted for a TRO and two (14 percent) voted against it. In the Senate, he recalled that the vote was 15 (65 percent) for the e-VAT and eight (35 percent) against.

"If even in the Senate, where the President did some arm twisting and patronage dangling, the most she got was 65 percent, how could anyone trifle that in the Supreme Court the 86 percent vote was the result of presidential interference?" Arroyo said.

He said that even during martial law, when justices were under constant threat, the most that dictator Ferdinand Marcos got was 77 percent of the vote.

At a briefing, Press Secretary Ignacio Bunye said the President would implement the e-VAT once the high court lifted the TRO.

He said the President was committed to the e-VAT law, including increasing the VAT rate from 10 percent to 12 percent, because it would raise revenues and address fiscal problems.

Bunye made the reaffirmation after Purisima and former Trade Secretary Juan Santos insinuated that the President might have influenced the Supreme Court to grant the TRO.

Rigoberto Tiglao, Presidential Management Staff chief, said Purisima and Santos had "misread" the President.

Tiglao said there was no truth to the allegation that the President had wanted the e-VAT postponed because of the political crisis.

"There are some advisers who recommended that the e-VAT be postponed simply because it could magnify the impact of rising oil prices. It was not because of the political crisis," he said.

He said either Santos had misread the President or he was not being intellectually honest.

Bunye said the fact that government lawyers were moving quickly to have the TRO lifted showed that the President considered the e-VAT a flagship measure.

"She worked hard to make this pass and I don't think the President will do something to prejudice the fiscal program of the government," Bunye said.

Unfortunate

The TRO has already prompted Fitch and Standard & Poor's to downgrade the country's outlook from stable to negative.

"It is unfortunate that Fitch suddenly reversed the outlook on the Philippines' credit rating from stable to negative. Their concern about the TRO on the e-VAT is a temporary setback on the reform program and should not derail the fiscal targets this year," Bunye said.

He said the President would soon announce the replacements of the seven Cabinet secretaries and three agency officials who resigned last week.

The 10 officials who resigned were Corazon "Dinky" Soliman, social welfare secretary; Florencio Abad, education secretary; Cesar Purisima, finance secretary; Rene Villa, agrarian reform secretary; Juan Santos, trade secretary; Imelda Nicolas, chair of the National Anti-Poverty Commission; Emilia Boncodin, budget secretary; Teresita Deles, presidential adviser for the peace process; Guillermo Parayno, internal revenue bureau chief; and Alberto Lina, customs bureau chief.

The President has already assigned officers in charge to man the main agencies, tapping Deputy Commissioner Jose Mario Bunag to head the Bureau of Internal Revenue and Deputy Commissioner Alexander M. Arevalo to lead the Bureau of Customs. With a report from Juliet Labog-Javellana

RP credit rating in peril

2005-07-12T08:31:00.000+08:00

RP credit rating in peril
First posted 02:04am (Mla time) July 12, 2005
By Doris Dumlao
Inquirer News Service

THE POLITICAL crisis is hurting the economy.

Stocks fell and the peso weakened after global rating agencies Fitch and Standard & Poor's downgraded yesterday their outlook on the country from "stable" to "negative."

In making the downgrade, Fitch and S&P cited not only political uncertainty amid calls for President Gloria Macapagal-Arroyo to step down but also doubts about the administration's political will to pursue unpopular reforms such as the expanded value-added tax (e-VAT), needed to restore fiscal health.

The move by the credit rating agencies caused the peso to close at 56.22 from Friday's 56.10 against the US dollar and the benchmark Philippine Stock Exchange Index to drop 1.3 percent to 1,852.78 after a two-day, 3.5-percent gain.

A revision in the outlook on the Philippine sovereign foreign currency means that a downgrade by these two rating agencies is likely in the near term.

A downgrade could affect the country's ability to service its debts because it raises the cost of borrowing. National Treasurer Omar Cruz acknowledged that the downgrade could raise the cost of government borrowing.

Weakened leadership

London-based Fitch, which had been the most optimistic about the country's prospects among major global rating agencies even after Malacañang declared a fiscal crisis in August last year, was the first to announce the downgrade.

"Fitch believes that in the context of the current political turmoil, it is open to question whether the weakened leadership will commit the necessary political capital to resolving the e-VAT issue soon," it said in a statement.

The resignation of the government's highly regarded economic managers led by ex-Finance Secretary Cesar Purisima, in particular, triggered fears of a possible reversal of the fiscal reform program that was the single biggest source of optimism among investors in the first few months of the year prior to the election-rigging scandal linking Ms Arroyo.

Fitch placed the country's rating on a "negative" outlook since December last year but changed this to "stable" in May because of significant strides in fiscal reforms, including the passage of the e-VAT law.

United States-based S&P voiced concern over the country's ability to maintain the fiscal consolidation needed to reduce its high level of public and external indebtedness.

"The combination of delayed fiscal consolidation, protracted political stalemate and a possible change in economic policy has shifted the balance of risks onto the downside, making a stable outlook no longer justified," S&P said.

It said its concerns stemmed from the political crisis sparked by allegations of electoral impropriety by the President and punctuated by the Supreme Court's freezing of the e-VAT and the departure of Ms Arroyo's economic team.

Over the weekend, Purisima and former Trade Secretary Juan Santos said a major factor behind their resignation was Ms Arroyo's alleged role in the Supreme Court's order freezing the implementation of the e-VAT amid the political turmoil.

Acting on petitions of the opponents of the e-VAT law, the high court froze on July 1 the e-VAT, which would raise the cost of electricity and fuel, airline and shipping fares and other previously exempt items, hours after its implementation.

Major setback

Fitch said a rating downgrade could be triggered by protracted delays in the Supreme Court decision, by an eventual decision that the e-VAT legislation was unconstitutional or by continued political disorder.

Fitch currently rates the country's long-term foreign currency rating at "BB" or two notches below investment grade and S&P, at BB-minus or three notches below investment grade.

In seeking a temporary restraining order (TRO) on the e-VAT implementation, opposition lawmakers had said it was unconstitutional for the President to increase the e-VAT rate from 10 percent to 12 percent next year.

The government is set to submit written arguments in preparation for oral hearings on July 14.

"The TRO was a major setback for the centerpiece of the government's fiscal reform program, especially given that no time frame has been set for a court decision," said James McCormack, senior director in Fitch's sovereign group.

"The e-VAT is critical to enhancing the Philippines' medium-term fiscal prospects and improving its public debt sustainability," he said.

Wake-up call

Bangko Sentral ng Pilipinas Governor Amando Tetangco Jr. said the government was pushing for the lifting of the TRO so that "this measure can be allowed to contribute to further fiscal improvement."

Renato Pizarro, the government economic team's head of investor relations, said the latest action by the rating agencies was an "unfortunate consequence" of the current political disturbances which displaced attention on the country's economic gains.

"This is a wake-up call for all of us to urgently shift our energies and attention to the economic imperatives ahead of us, lest we find ourselves in considerably fragile ground where the gains we have had from recent fiscal and economic reforms will be substantially eroded by political tensions," Pizarro said.

Financial markets

While the TRO was in effect, Pizarro said the government would concentrate revenue-generation efforts on all fronts.

A currency dealer said the foreign exchange market would trade sideways while digesting further developments on the political front.

Another trader said that "as long as the problem is there, trading will continue to be within the upper range of 56.20-56.45." The latter figure is the all-time low for the local unit.

Jose Vistan, an analyst at AB Capital Securities, said the stock market was bearish on concerns of a drawn-out political turbulence.

"The preference is not whether GMA (Ms Arroyo) would stay or not, but that it's best to end this political crisis," Vistan said.

"At this point, any resolution is better than status quo or a prolonged situation where the President has lost the confidence of businessmen," said Joseph Roxas, president of stock brokerage Eagle Equities Inc.

Crisis to worsen

Others expect the political crisis to worsen.

"She has managed through the intervention of former President (Fidel) Ramos as well as the Catholic Church to hold onto power. President Arroyo has set the stage to continue political mud-slinging," said Tim Condon, head of Asian financial markets research at ING Financial Markets.

S&P expressed concern that recent events may exacerbate the country's external vulnerability to three global trends: moderating growth, rising interest rates and skyrocketing oil prices.

With public sector debt of more than 90 percent of gross domestic product and net general government external debt of 48 percent of current account receipts, the Philippines is considerably more exposed to these risks than its peers, according to S&P.

S&P said the country's ratings continued to be backed at the current level by adequate external liquidity given its stable foreign reserves. But it said this support could be negated by a drawn-out political crisis and by lower investor confidence that could precipitate a sharp fall in the peso and foreign exchange reserves through capital flight. With reports from Inquirer wires

Malacañang says it had no hand in VAT freeze

2005-07-12T08:27:00.000+08:00

Malacañang says it had no hand in VAT freeze
... but adviser says move was to ’pacify the opposition’
Business World Online

Malacañang yesterday admitted that President Gloria Macapagal Arroyo did broach the idea of delaying the implementation of an expanded value-added tax (VAT) law, but insisted it was not to buy her political time.

A lawmaker, however, said the VAT law was suspended in a bid to lessen pressure on the President. A lawmaker, a close adviser of the President, also said the resignation of 10 key officials last Friday had something to do with the suspension of the VAT law.

The adviser, who refused to be named, said the Palace encouraged the suspension to "pacify the opposition" and subdue the populace in a time when Mrs. Arroyo was struggling with low satisfaction ratings and hounded by allegations of corruption and electoral fraud.

Former Finance Sec. Cesar Purisima, one of the ten senior officials who resigned, has said the President expressed a desire to see the VAT law suspended.

According to the lawmaker, Mr. Purisima’s statement was a "fair description" of what happened.

However, Presidential Management Staff head Rigoberto D. Tiglao told a TV interview that the President was concerned that the VAT law would further drive up domestic fuel prices at a time when world oil prices had risen to new heights.

"There were some advisers who recommended, who thought that the EVAT, in terms of petroleum prices, should be postponed at the moment. If ever the President [expressed desire to delay the implementation of the law], it was not because of the political crisis, but because volatile oil prices would magnify the impact of additional costs," he said.

He denied that Malacañang had a hand in the Supreme Court’s issuance of a temporary restraining order (TRO) on July 1, the first day of the VAT law’s implementation.

The Supreme Court, meanwhile, rejected the accusation, with SC Public Information Chief Ismael G. Khan, Jr. insisting the court issued the TRO pending the resolution of several petitions filed by the opponents of Republic Act 9337.

"There’s not a kernel of truth to that alleged pressure from Malacañang. The court simply acted on the petitions," Mr. Khan told BusinessWorld.

Opposition lawmakers and petroleum dealers earlier asked the court to void the VAT law, claiming it contained provisions violating the 1987 Constitution.

Mr. Khan noted that Chief Justice Hilario Davide -- a supporter of Mrs. Arroyo -- had voted against the TRO.

Observers, however, have noted that all SC justices appointed by Mrs. Arroyo backed the freeze order.

Asked on whether Mr. Purisima and others would be held liable for their accusations, Mr. Khan said: "It might be inappropriate to second guess or speculate on what the Supreme Court might do to the people who spread that rumor".

Sen. Joker P. Arroyo, meanwhile, lamented that the Supreme Court had been "irresponsibly dragged" into the political crisis.

"No responsible member of the Bar has ever dared in the past to suggest that anyone, not even the President of the Philippines, can lasso a big bloc of justices to vote the way the President wants it," he said.

Of 15 Supreme Court justices, 13 or 86% voted in favor of the TRO, which Mr. Arroyo said was a statistical impossibility as the highest vote then President Ferdinand E. Marcos got from the high court was 77%.

Even in the Senate, where the President "did some arm-twisting and patronage dangling," she only got 15 votes in favor of VAT or 65%, Mr. Arroyo claimed. -- reports from Judy T. Gulane, Kristine L. Alave, Ma. Eloisa I. Calderon and Francis Y. Capistrano

Ratings firms’ outlook on RP turns negative

2005-07-12T08:26:00.000+08:00

Ratings firms’ outlook on RP turns negative
They question state’s ability to improve finances
Business World Online

Two of three global debt ratings agencies yesterday cut their credit rating outlook on the Philippines to "negative" from "stable," citing heightened political uncertainty and the Supreme Court decision to freeze the implementation of a crucial tax measure.

The cut is limited to debt outlook and did not cover actual debt ratings, which have been below investment grade for sometime. As such, any immediate effect on the government’s borrowing cost is not expected.

But Fitch Ratings also said in a statement issued in Hong Kong that "a rating downgrade could be triggered by protracted delays in the Supreme Court decision, an eventual decision that the expanded value-added tax legislation is unconstitutional, or continued political disorder."

Meantime, it affirmed the Philippines’ long-term foreign and local currency ratings at "BB" and "BB+," respectively. The short-term foreign currency rating remained at "B" and country ceiling at "BB."

In London, Standard & Poor’s Ratings Services also revised its outlook on the government to "negative" from "stable." At the same time, the "BB-/B" foreign currency and "BB+/B" local currency ratings on the sovereign were affirmed.

A "BB" rating indicates the "possibility of credit risk developing, particularly as the result of adverse economic change over time."

The outlook downgrade also covered debts of select Philippine corporations (see related story) and banks (see related story).

In a statement, S&P said "the outlook revision highlights [its] concerns over the country’s ability to maintain the fiscal consolidation needed to reduce its high level of public and external indebtedness."

"This concern stems from the ongoing political crisis in the country -- sparked by allegations of electoral impropriety by the President, and punctuated by the Supreme Court’s freezing of an expanded sales tax, and the departure of President Arroyo’s economic team."

Still to report a change in Philippine debt rating outlook is US-based Moody’s Investor Service.

On July 1 the Supreme Court stopped the implementation of a new value-added tax (VAT) law, the core of the Arroyo government’s fiscal reform agenda aimed at reducing the state’s massive budget deficit.

"The [court’s] temporary restraining order was a major setback for the centerpiece of the government’s fiscal reform program, especially given that no time frame has been set for a court decision," said James McCormack, Fitch’s senior director for the sovereign group.

"The VAT is critical to enhancing the Philippines’ medium-term fiscal prospects and improving its public debt sustainability," he said.

The law keeps value added tax at 10% but expands its coverage to include other previously exempt sectors such as fuel and electricity.

President Gloria Macapagal-Arroyo is facing mounting calls to resign and an impeachment complaint has been filed against her in Congress amid allegations she cheated her way to victory in last year’s election.

Ten cabinet members including her economic team resigned last Friday and former President Corazon Aquino and a leading business group have urged her to step down.

Mrs. Arroyo has apologized for a lapse of judgement in phoning an election commissioner during the vote count but denies trying to cheat and refuses to resign.

On Sunday Roman Catholic bishops gave her a reprieve when they refused to back calls for her resignation. Ex-President Fidel Ramos has also backed her.

Fitch said it was questionable in the context of the current political turmoil whether the "weakened leadership" would commit the necessary political capital to resolving the tax issue soon.

It said the political situation may prove detrimental to the country’s broader economic performance, as well as consumer and investor sentiment and developments in financial markets.

In a separate statement, S&P also said that even if recent fiscal measures had improved tax collection and had cut the government’s budget deficit, "maintaining and expanding these trends requires sustained strong political commitment and effective governance, which are stymied by the ongoing political disturbances."

"By adding to policy uncertainty and prolonging the delay in fiscal consolidation, recent events may also exacerbate the country’s external vulnerability to three global trends: moderating growth, rising interest rates, and upward oil prices," it added.

With public sector debt now more than 90% of the economy’s total output, the Philippines is considerably more exposed to these risks than its peers, it added.

"The combination of delayed fiscal consolidation, protracted political stalemate, and a possible change in economic policy has shifted the balance of risks onto the downside, making a stable outlook no longer justified," S&P said.

It noted that the country’s current debt ratings were supported by stable foreign reserves, among others. But this support can also be at increased risk by a drawn-out political crisis, or if lower investor confidence precipitates a sharp fall in the peso and foreign exchange reserves through capital flight, it added.

"Failing a timely resolution of the leadership crisis, risk perceptions toward thecountry are set to increase, ultimately putting pressure on the ratings at the current level. The ratings could, however, revert to a stable outlook once the political crisis is over and the government returns to a credible and sustained fiscal consolidation process," S&P said. -- AFP with Reuters

Palace hopes for speedy resolution of EVAT petition

2005-07-11T12:45:00.000+08:00

Palace hopes for speedy resolution of EVAT petition
By Aurea Calica
The Philippine Star 07/11/2005

Press Secretary Ignacio Bunye called on the Supreme Court yesterday to speed up resolution of the case holding at bay the expanded value-added tax (EVAT).

The high court issued an indefinite temporary restraining order on the day EVAT was to be implemented on July 1, after opposition lawmakers and other sectors filed a petition against it citing unconstitutionality.

Bunye said President Arroyo considered the EVAT her administration’s flagship measure to put the country’s fiscal house in order.

"She is determined to have the TRO issued by the Supreme Court lifted as soon as possible," Bunye said. "We can only hope that the Supreme Court will act with dispatch in reviewing the case."

Bunye underscored the revenues that should have gone to government coffers were it not for the TRO on the EVAT, disputing speculations that the Palace had a hand in deferring the tax.

Malacañang described as "preposterous" former Finance Secretary Cesar Purisima’s claims that Mrs. Arroyo wanted to delay the implementation of the EVAT law for her political survival.

"In reality, the President had already taken heavy political blows when she herself initiated an unpopular but necessary economic reform program," Bunye said.

Bunye clarified Mrs. Arroyo made the political gamble of pushing for the implementation of the EVAT even if it will cost her popularity.

"She has nothing to gain in the delay of the EVAT’s implementation," Bunye said.

Purisima earlier claimed Mrs. Arroyo telling him of her desire to delay the EVAT implementation. He did not however directly accuse Mrs. Arroyo of trying to influence the Supreme Court in handing down the TRO.

Various groups, on the other hand, said Purisima and the rest of Mrs. Arroyo’s economic advisers in charge of the country’s fiscal house became disgruntled because of the TRO issued by the court.

National Economic and Development Authority (NEDA) general manager Romulo Neri also hit the erstwhile finance secretary for assailing the wisdom and decision of the President.

"The thing is I also came from a management school myself. There are principles of leadership that you follow and one of them really is the issue of loyalty to your superior and if you have a problem with your superior, I think you should take it up with him or her," Neri said.

Neri said Purisima "himself has violated the basic principle of leadership." Neri said the faction led by Purisima never asked him to join them to force Mrs. Arroyo to resign.

"Second, if they ask me, I do not believe in these types of activities. I believe that if you have a problem with your boss, there are many ways of stating, saying it to your boss without having to do this theatric type of activities," he said.

To suspect the President herself had something to do with the TRO was not only unfair but a contempt to the court itself, according to Justice Secretary Raul Gonzalez.

"It has been made to appear that the court was dictated (to) by the President and that violates the separation of powers," he said.

Foreign Affairs Secretary Alberto Romulo and Speaker Jose de Venecia Jr. noted Mrs. Arroyo would not have risked political capital on the EVAT passage just to have it stopped.

Deputy spokesman and Secretary of the Cabinet Ricardo Saludo said the implementation of the EVAT had long been prepared for by the executive.

Saludo said the government would not risk an adverse market reaction by having the EVAT stopped.

De Venecia said Mrs. Arroyo had displayed her strongest political will in having the VAT passed by Congress.

It would be illogical to say if the President wanted it put on hold for the sake of popularity and self-interest, De Venecia stressed.

No Free Lunch: Undue ad-VAT-age

2005-07-11T12:42:00.000+08:00

No Free Lunch: Undue ad-VAT-age
Posted: 6:19 PM Jul. 10, 2005
Cielito Habito
Inquirer News Service

Published on Page B6 of the July 11, 2005 issue of the Philippine Daily Inquirer

BEFORE the Supreme Court issued its temporary restraining order (TRO) against the Expanded VAT (e-VAT) Law or R.A. No. 9337, huge streamers hung across portions of the South Luzon Expressway (and I suppose along its counterpart in the north as well) announcing that effective July 1, an additional 10 percent would be added to the highway tolls due to implementation of e-VAT.

Prices of refined petroleum products were similarly poised to be raised by 10 percent (about P3 a liter) on July 1. Same is true with our electric power bills. Domestic airlines had similarly served notice that airfares were to go up by 10 percent to reflect the addition of the VAT. Meanwhile, having been subject to the VAT even before RA 9337, a major cellular phone service provider has been routinely adding a 10-percent VAT to its service charges in the monthly bills of postpaid subscribers all these years.

There is something terribly wrong in all of this.

Necessary evil
Don't get me wrong; I am not against the VAT, or even the e-VAT Law. Unpopular as the law is, I am among those who lament the Supreme Court's action halting of the collection of the VAT on previously exempted goods and services now subject to the tax with its expanded coverage under RA 9337. My position has always been, as it remains now, that expanding the coverage of the VAT and raising its rate from 10 to 12 percent had become a necessary evil to speed up resolution of the government's fiscal crisis. It wouldn't have been as necessary had Congress (and allegedly Malaca¤ang as well) not succumbed to pressure to water down the earlier law that could have dramatically raised the yield of excise taxes on "sin" products.

While the ideal would have been to achieve dramatic improvement in tax administration without raising additional taxes, we all know that such improvement will not happen overnight. This is notwithstanding the impressive gains being made by just-resigned Revenue Commissioner Willy Parayno in effecting greater tax compliance, whose results have already been evident in past months. He and Finance Secretary Cesar Purisima were among the most prominent saving graces of the beleaguered Arroyo administration, and their principled resignation now deals a most telling blow to the government's economic management efforts, particularly in overcoming the fiscal crisis.

Disguised price increase
Even if we were all to accept the imposition of the VAT on previously exempted items like highway toll fees, domestic airline tickets, petroleum products and electric power, it is wrong and unjustified to simply add on 10 percent to the pre-VAT prices of these commodities paid by us end-consumers. Doing so would be tantamount to imposing on all of us a disguised price increase for these products.

This is because the e-VAT actually increases the cost of providing these products to the end-consumers by much less than 10 percent. Let us not forget that these same firms will still be able to credit VAT payments made on their inputs against the 10-percent VAT computed on their final output. Under the limits of the new law, these input VAT credits can go up to 70 percent of the output VAT due from these firms. Before e-VAT, many VAT-able firms were actually claiming input VAT credits even in excess of the VAT due on their output, leading to a negative net VAT payable to BIR!

This should tell us consumers, then, that even if firms entirely pass on to us the additional cost of the e-VAT, it should be significantly less than 10 percent of the value of their output. Assuming the maximum 70 percent input VAT credit, the additional burden that should be passed on to us should only be 3 percent. By collecting 10 percent from us, the firms in this case would have actually hit us with an unjustified 7-percent price increase.

Note that even the 10-percent VAT added to our bill by a cell phone company all these years effectively collects from us more than what the company actually remits to BIR.

Tax offsets
There's even more reason why a simple 10 percent addition to price is highly unjustified. In the case of fuel and electricity, Energy Secretary Raphael Lotilla had recently pointed out that the hike in their prices should be less than 10 percent because "mitigating measures" would reduce this increase on certain products to only 6 percent. He was referring to the corresponding cut in excise taxes and import duties that was to accompany the imposition of the VAT, particularly for diesel fuel and kerosene.

In the case of airlines, the 10-percent VAT on domestic airfares actually replaces the 3-percent common carrier's tax. Thus, the maximum net increase in their tax burden is only 7 percent. And given the input VAT credits they can still claim, the net increase in their price should be even less. At the same time, domestically owned airlines operating international flights have had the 3-percent percentage tax replaced by a zero VAT for foreign passengers (i.e. because all export sales are levied a zero VAT), with the possibility of claiming input VAT credits to boot! Thus, a simple 10-percent addition to fares would clearly be unwarranted.

I am not arguing against the VAT, nor the e-VAT. But when that TRO does get lifted, and the newly covered companies then hit us with a full 10-percent addition to the price, we should all be aware that we are being taken undue advantage of.

Palace denies delay in VAT implementation

2005-07-11T10:57:00.000+08:00

Palace denies delay in VAT implementation
Business World Online
BY JUDY T. GULANE, Reporter

Malacañang yesterday denied that President Gloria Macapagal Arroyo worked for a delay in the implementation of an expanded value-added tax (EVAT) law, as alleged by two former members of her economic team.

In his weekly column "The View From the Palace," Press Sec. Ignacio R. Bunye said: "It is preposterous to say that the President had wanted a delay in the implementation of the EVAT for political survival... She has nothing to gain in the delay of the EVAT’s implementation."

He added the President considered the new tax law the centerpiece of her government’s economic reform program, and was determined to have the Supreme Court restraining order on it lifted.

Mr. Bunye also pointed out that the President worked hard to push the passage of the law by Congress, expending her popularity ratings in the process.

Cabinet Sec. Ricardo L. Saludo told a press conference on Friday that the government was, in fact, ready to implement the EVAT law.

He also took pains to explain that government could not favor law’s freeze given that damage to the country was greater, in terms of peso and stocks losses, compared to the cost for mitigating the price increases as a result of the new VAT law’s implementation.

Former Trade and Industry secretary Juan B. Santos and Finance secretary Cesar A. V. Purisima on Saturday said President Arroyo asked them if it was legally possible to extend the implementation of the EVAT law.

The law was supposed to take effect on July 1. The two, who resigned Friday, said they told the President, "it should not be extended."

The Supreme Court came out with a temporary restraining order, signed by President Arroyo’s appointees, on July 1. Oral arguments are set on July 14, and a decision is expected 10 to 14 days after.

Mr. Purisima highlighted the importance of the EVAT law in raising revenues for the government and in improving its income statement that has been in the negative since 1998.

He also expressed frustration that none of the tax evasion charges filed with the Department of Justice (DoJ) have been filed before the courts. "Going after tax evaders requires political will because these are powerful people. But the [DoJ] has not taken any action," he said.

Messrs. Santos and Purisima were among the secretaries who resigned last Friday.

The others were Budget and Management’s Emilia T. Boncodin, Social Welfare and Development’s Corazon Juliano-Soliman, Education’s Florencio B. Abad, Land Reform’s Rene C. Villa, Internal Revenue commissioner Guillermo L. Parayno, Jr., Customs commissioner Alberto D. Lina, presidential adviser to the peace process Teresita Quintos-Deles, and National Anti-Poverty Commission lead convenor Imelda M. Nicolas.

SNUBBED REFORMS

Meanwhile, it was not only the EVAT freeze that prompted the 10 members of the Cabinet to irrevocably resign last Friday.

There were reforms not undertaken or undertaken too late -- reforms suggested by these and other Cabinet members to arrest Mrs. Arroyo’s plummeting credibility among the public.

Among these was to make Cabinet and other appointed positions vacant to get rid of appointees closely associated with First Gentleman Jose Miguel T. Arroyo, reorganization of the Commission on Elections (Comelec), and declaration of policies regarding the Philippine Amusement and Gaming Corp., the coco levy, and the fiscal reform program that has been stymied with the Supreme Court freeze on the new VAT law.

But the President did take some of their suggestions, Mr. Santos acknowledged. Among these were pronouncements regarding the wiretapped conversations and Mr. Arroyo’s exile to the United States.

But there were none immediately after these, with the President choosing to make what the group called as "decisions... guided mainly by her determination to survive as President," which have short-term effects.

The appointment of Appeals Court Justice Romeo A. Brawner as Comelec commissioner and announcement of a Cabinet reorganization were supposed to have been done weeks ago.

"The announcements should have come one after the other for the President’s credibility to come back," Mr. Santos said.

For the President and some Cabinet members, Mr. Purisima said, it had become "survival at all cost." "But we needed the reforms so she could survive and govern. These were neglected."

Because the President’s political survival had become paramount, she was wont to make compromises, Ms. Deles said, especially among the "powerful people" who were going to be affected by the reforms they had suggested.

Mr. Santos said the political uncertainty was affecting investments to the Philippines "but not to a degree where I am alarmed." Investors, however, will always question the stability of the presidency.

"Investors are not really worried about politics. But if it begins to erode credibility and leadership, such that the leadership is besieged and can no longer decide or is compromised not to take the necessary measures, then those are signals ...negative to investors," he said.

Gov’t wants Congress to overhaul tariff law

2005-07-11T10:54:00.000+08:00

Gov’t wants Congress to overhaul tariff law
Business World Online

The Finance department wants the "overhaul" of the Tariff and Customs Code included in the legislative agenda for the next Congress, Finance Undersecretary Emmanuel P. Bonoan told reporters.

This aims to make the code "more responsive" to World Trade Organization rules, and to boost the fight against smuggling, he added.

Finance will "consolidate different isolated efforts" in Congress to make changes to the tariff code, he said.

Mr. Bonoan said Finance would want to raise the penalty for smuggling, as well as to redefine customs bonded warehouses to allow duty-free importation for raw materials only for export products.

Customs bonded warehouses have long been tagged as smuggling conduits.

The government is estimated to have lost an average of P175 billion annually from smuggling.

Mr. Bonoan also said the tariff code would be harmonized to cover even economic zones, which have been treated as separate customs territories.

The tariff code’s overhaul is among Finance’s "long-term" legislative wish list that was finalized in a workshop last week. Also on the list are capital market reforms, Mr. Bonoan said.

Finance wants these initiatives legislated by next year. For this year, its priorities are legislation on the Simplified Net Income Tax System, which allows taxpayers to claim standard tax deductions; the fiscal incentives bill; the extension of the Special Purpose Vehicle Act, which allows banks to further reduce nonperforming loans; and the increase in the cap on input VAT, or value-added tax paid on production inputs that can be deducted from a business’ VAT obligations, to 90% from 70%.

Overall, the Finance department wants to consolidate revenue gains from tax laws passed previously by Congress, Mr. Bonoan said.

"We don’t want new [taxes]. We want systems changes to make it easier for the [tax bureau] to collect taxes," he added.

Congress late last year passed a law that raised the excise taxes on cigarettes and liquor. It was controversial, with some sectors insisting that the legislation favored particular business interest.

This year Congress also legislated a new value-added tax that removed the exemptions previously enjoyed by several sectors, including oil companies and electric utilities. The law’s implementation, however, was put on hold by a Supreme Court order. -- Felipe F. Salvosa II

Philippines still on right fiscal track, says Bear, Stearns

2005-07-08T09:26:00.000+08:00

Philippines still on right fiscal track, says Bear, Stearns
Posted: 2:36 AM Jul. 08, 2005
Michelle V. Remo
Inquirer News Service

CONCERN that the Philippines is on the verge of a fiscal crisis, following the suspension of the expanded value-added tax (VAT) law, may prove to be an exaggeration, says US-based investment bank Bear, Stearns & Co. Inc.

With or without the new VAT law, the Philippines is still on track and on its way to fiscal recovery, Bear, Stearns said.

"The important thing to keep in mind is that the fiscal situation in the Philippines is improving, although at a slower pace without the VAT law," the bank said in its latest analysis on the Philippine economy. "In our view, the Philippines is not getting worse."

In supporting its view, Bear, Stearns cited an announcement by National Treasurer Omar Cruz that the national government would likely register another one-month budget surplus in June, after a surplus in April, which was the first in four years.

The Department of Finance will report next week on the national government's budget position for June and for the first half of the year.

Bear, Stearns, still citing Cruz's announcement, said the government likely had a January-June budget deficit that was P30 billion below the target ceiling.

The target limit is P98.5 billion for the first half of the year and P180 billion for the full year.

But Bear, Stearns said that with the new VAT law the government could accelerate the attainment of its medium-term goal of wiping out its budget deficit.

The law, which removes exemptions of certain sectors, including oil and electricity was estimated to generate as much as P31 billion in incremental revenue in the second half of the year and P105 billion annually starting next year.

The law gives the President standby authority to raise the VAT rate to 12 percent in January, from the present 10 percent.

The Supreme Court suspended enforcement of the law on July 1, the day it took effect, on a question of constitutionality.

Bear, Stearns said the Supreme Court's temporary restraining order on the VAT law would even benefit embattled President Macapagal-Arroyo politically, because it may prevent inflation from rising further.

"Full implementation of the VAT law on July 1 would likely have pushed the inflation rate back above 8 percent, and maybe even 9 or 10 percent," it said. "This would have been very bad for President Arroyo -- from a political point of view -- at this time."

Bear, Stearns noted risks that would follow the court's suspension of the VAT law, such as that the law might ultimately be declared null and void. With INQ7.net

Brokerage firm says VAT can push through sans next year’s 12% rate

2005-07-08T09:16:00.000+08:00

Brokerage firm says VAT can push through sans next year’s 12% rate
BY KAREN L. LEMA, Senior Reporter
Business World Online

The Arroyo administration should consider dropping a planned 12% hike in the value-added tax (VAT) next year to pave the way for the law’s implementation, a local brokerage firm said.

In a research note, ATR-Kim Eng Securities, Inc. underlined the urgency of implementing the key tax plan since the most pressing problem of the economy is attaining fiscal stability.

The brokerage firm noted that the suspension of the VAT law’s implementation has proven to be more damaging to the economy than the political controversies hounding the Macapagal Arroyo administration.

"The shocks to the financial markets were of two kinds, political and economic and the markets were rightly punished more heavily when economic fundamentals were seen to have been threatened," ATR-Kim Eng said in a July 5, 2005 paper.

IMPACT JUSTIFIED

ATR-Kim Eng said the weakening of the peso and the stock market plunge following the Supreme Court order freezing the VAT "is justified" because the new law is deemed the "most powerful tool to address [the fiscal problem] immediately."

"By itself, the expanded VAT was expected to raise some P26 billion in additional revenue for its six months implementation in 2005, more than the combined P21 billion from the full-year implementation of the increase in "sin" taxes and the rise in import duties of crude oil and petroleum products," it added.

UPGRADE

"It was the passage of the expanded VAT that prompted an upgrade in the sovereign credit outlook by Fitch Ratings and allowed the possibility that the national government’s budget deficit would be significantly better than the original target for 2005," ATR-Kim Eng continued.

In contrast, the brokerage firm said the political turmoil caused by allegations that Mrs. Arroyo cheated in last year’s elections as well as charges of illegal gambling payoffs for members of her family "never reached boiling point because of the disorganized opposition and President Arroyo’s efforts to make amends for her lapse and the lack of a credible alternative to the current regime."

The brokerage firm said the VAT impasse could still be solved by the government should the Supreme Court refuse to heed the government’s appeal.

It said that the government may remove the contested provision and pave the way for the implementation of the rest of the provisions which mandate, among others, the lifting of a number of VAT exemptions.

CARVE IT OUT

"In the worst case, should the Supreme Court not back down from its injunction, the Arroyo administration has the option of carving out the contested provision, the VAT increase, which anyway was to have been implemented in 2006 yet," ATR-Kim Eng said.

"The first two parts consisting of the expansion of coverage and the increase in corporate income tax, which were implemented in 1 July, being uncontested, can continue to be implemented," the brokerage firm added.

ATR-Kim Eng noted that the disputed provision can always be "reworked in Congress to remedy its constitutional deficiency until the end of the year."

"On the whole, we believe the probability of resuming the implementation of the expanded VAT is quite high. The caveat however, is that this will be done against the background of heightened political tensions."

DOF, BIR give delinquent taxpayers one month to settle their arrears

2005-07-07T07:38:00.000+08:00

DOF, BIR give delinquent taxpayers one month to settle their arrears
By Des Ferriols
The Philippine Star 07/07/2005

The Bureau of Internal Revenue (BIR) announced yesterday that it was offering a one-month period where taxpayers with deficiencies can volunteer to settle their arrears and avail of lower surcharge.

Taking care not to call it a tax amnesty, the Department of Finance (DOF) and the BIR issued yesterday the guidelines for what they call a "voluntary correction of tax deficiencies" to avoid being audited and prosecuted for tax evasion.

According to the BIR, taxpayers who would volunteer to settle their tax arrears would be allowed to pay a reduced surcharge ranging from zero to 23 percent depending on the date of payment.

The surcharge, however, will still be collected on top of the basic tax and interest on delayed tax payment.

"Taxpayers rectifying their tax returns will be allowed to enjoy the lower surcharge limit of zero percent if they pay within this month," the BIR said in a statement.

"The upper surcharge limit of 23 percent will be slapped on taxpayers paying their amended tax deficiencies in December 2005," the BIR added.

According to the BIR regulation, payments of the basic tax and the corresponding interest and surcharge may be made in one-time payment or in installments.

"All payments, however, must be made not later than Dec. 31, 2005 for taxpayers to avail themselves of the relief granted under the revenue regulations on tax surcharge abatement," the BIR said.

The BIR also stressed that the program for tax surcharge abatement would no longer apply to taxpayers who have already been served letters of authority, letter notices or discrepancy notices by the BIR for the tax period for which an amendment of tax return is being applied for.

"This is not a tax amnesty," said Finance Secretary Cesar V. Purisima. "The taxpayers paying tax deficiencies have to pay interest and surcharges ranging from zero to 23 percent, depending on when they pay the surcharges levied on them."

"They will enjoy lower surcharges if they pay earlier than the Dec. 31 deadline," Purisima said.

According to Purisima, the surcharge abatement program was being implemented in response to taxpayers who have offered to voluntarily correct their tax liabilities.

Purisima attributed the taxpayer response to the success of the DOF and the BIR’s Run After Tax Evaders (RATE) program which had made an example of various prominent business, entertainment, sports and political personalities who are now facing charges of tax evasion.

Slight GDP growth seen in 2nd quarter

2005-07-07T07:37:00.000+08:00

Slight GDP growth seen in 2nd quarter
By Des Ferriols
The Philippine Star 07/07/2005

The economy is expected to post a slight improvement in the second quarter of the year due to the initial impact of the increase in power rates and some growth in the services sector, government sources disclosed yesterday.

After expanding by a slower 4.6 percent in the first quarter, government economists said they expect another plateau in the second quarter but added a slight growth is possible depending on the performance of the agriculture sector.

Sources from the Development Budget Coordinating Committee (DBCC) said that the second quarter gross domestic product (GDP) would be supported by the continued growth of the services sector which accounts for 48 percent of total domestic output.

In industry, they said utilities are expected to pick up slightly from the adjustment in power rates and the initial impact of the oil price hikes that benefited oil companies.

According to sources, only agriculture was still a wildcard although there were indications that good weather had allowed early harvest during the last month of the quarter.

Sources explained that even the slowdown recorded in the first quarter was expected since economic activity had already reached a plateau earlier.

"When you see a plateau, the next thing you’d expect is deceleration," they explained. "But there are indications that the deceleration has somewhat abated and there might be a slight improvement in our growth rate in the second quarter."

The first quarter GDP had decelerated from 6.4 percent over the same period last year to only 4.6 percent this year and even with the 6.7 percent growth in Net Factor Income from Abroad (NFIA), the gross national product (GNP) still grew by a slower 4.7 percent, from 6.4 percent a year ago.

In the second quarter, the services sector is expected to sustain the 6.9 percent growth it recorded in the first quarter while industry is projected to hold steady.

Services, which comprise about 48 percent of total GDP, provided the biggest contribution to GDP growth with 3.23 percentage points. The leading contributors to the sector’s growth in first quarter were trade, transportation, commu-nication and storage (TCS), and ownership of dwellings and finance.

Industry, which accounts for about 32 percent of GDP contributed 1.38 percentage points to total GDP growth. All sub-sectors posted higher growths but the decline of mining and quarrying caused the overall deceleration of industry during the quarter.

Agriculture, fishery and forestry (AFF), which accounts for about 20 percent of total GDP suffered a reversal during the first quarter of 2005, contributing a negative 0.02 percentage point to total GDP growth as most of the major crops, except coconut and banana, declined during the period.

Fishery and poultry were the saving graces, providing 2.17 percentage points to total AFF growth.

ADB to cut RP growth forecast

2005-07-07T07:36:00.000+08:00

ADB to cut RP growth forecast
The Philippine Star 07/07/2005

The Asian Development Bank (ADB) is likely to cut its growth forecast for the Philippines to below five percent this year amid setbacks to its fiscal reforms and soaring oil prices, a senior official said yesterday.

But the country is not on the brink of a financial crisis despite the economic problems and political turmoil that include calls for President Arroyo to step down, said the ADB’s country director, Tom Crouch.

On the other hand, the Makati Business Club (MBC) said in a statement the Supreme Court’s order stopping the implementation of Republic Act 9337, the Expanded Value-Added Tax Law, is a big setback to the government’s effort to raise revenues as part of its fiscal reform program.

"The EVAT measure signed into law on 24 May 2005 and whose implementing rules and regulations were released on 27 June 2005 is the centerpiece of the government’s eight-point priority measure to address the fiscal deficit," read the statement.

"The Department of Finance expected to collect P28 billion-P35 billion this year from the EVAT revenues. For 2006, the measure is seen to bring in some P97 billion-P105 billion," it said.

However, Trade Secretary Juan Santos asserted yesterday that local and foreign businessmen and investors have not changed their investment plans in spite of current political developments.

Santos, who has been meeting with local and foreign businessmen, investors and business groups, is also optimistic that the peso’s weakness is temporary and that it would rebound.

Following the meetings, "they don’t seem to have changed their plans to invest," he added.

Santos said there would be major investment announcements soon.

"Korean investors are coming," he hinted, without giving details about the investment.

Earlier, reports said Japanese appliance manufacturer Uniden is planning to relocate its manufacturing operations back to the Philippines from China.

The MBC said the Supreme Court decision has once again sent negative signals to investors about the instability and unpredictability of the government’s economic policy and legislation from Congress.

"Both Congress and the executive worked almost a year on the measure and the MBC believes that the due diligence was exercised in the conduct of RA 9337’s passage. Preventing its implementation puts to waste the millions of pesos utilized for its passage."

Crouch told The Associated Press the ADB in April predicted the country’s economic growth would be moderate at five percent for 2005 and 2006, but is likely to revise its projection down below five percent given the fresh developments.

"The Philippines is not in crisis, although it does face serious economic challenges," he said.

Crouch said first quarter growth this year already has slowed to 4.6 percent from 6.4 percent in the same period last year.

"While the suspension of the EVAT is a serious setback, it need not be totally debilitating," he said.

Crouch said a slowdown in the world economy, softer demand for Philippine exports, sustained higher global oil prices and rising international interest rates exacerbate the country’s woes.

Crouch said there had been "continuity and consistency" in economic plans following the ouster of the late dictatgor Ferdinand

Marcos in 1986 and of President Joseph Estrada in 2001.

"While each administration might adjust the priorities of programs and investments, the broad strategy for economic development remains fairly stable and does not move about violently as administrations change," he said.

"Over the next few years, the economic challenges will remain the same - fiscal consolidation, improving the investment climate, and improving governance. The need for deeper and sustained reforms remains dominant."

Meanwhile, the Philippine Chamber of Commerce and Industry (PCCI) prefers a selective TRO on just three provisions of the EVAT.

Otherwise, the PCCI supports the lifting of the TRO on the EVAT Law.

The three specific provisions that the PCCI believes should be subjected to a TRO are the provision on a higher corporate tax of 35 percent; imposition of a 70 percent cap on the input VAT, and allowing the President to raise at some point the VAT rate from 10 to 12 percent.

PCCI president Donald Dee said the corporate income tax (CIT) provision, is not investor friendly and could result in "either divestments or withdrawal of current foreign investors or decrease in the influx of new investments."

Dee warned that the CIT "may cause existing legitimate business enterprises to disappear from the Bureau of Internal Revenue’s view and go underground just to escape this onerous tax burden or drive them to resort to outright tax evasion."

The 70 percent cap provision would "deter economic and business development and create additional burden to consumers," he added.

The government said the extra tax funds are needed to raise some

P100 billion pesos a year in new revenues needed to pay off massive public debts and curb a swollen budget deficit.

Philippine stocks have taken a beating while the peso has tumbled to a near-record low following the Supreme Court’s decision Friday to temporarily halt an expansion in the EVAT that was central to the government’s fiscal reform efforts.

The temporary restraining order, issued just hours after the EVAT took effect, was the latest blow to Mrs. Arroyo who faces a clamor to step down over allegations she rigged last year’s presidential election.

Last Tuesday, the Supreme Court advanced oral arguments on the case to July 14, from July 26.

Credit rating agencies have warned that a prolonged suspension of the tax threatens the country’s sovereign credit ratings, which are already at junk levels. — Marianne Go, AP, AFP

Gov't financial crisis looms because of VAT freeze

2005-07-07T07:33:00.000+08:00

Gov't financial crisis looms because of VAT freeze
Posted: 2:30 AM Jul. 07, 2005
Inquirer News Service

BUSINESS leaders warned Wednesday that a Supreme Court injunction against President Gloria Macapagal-Arroyo's key tax reform measure could drive the government closer to a financial crisis.

The court on Friday indefinitely suspended the collection of an expanded value-added tax (VAT) that took effect on the same day, citing a challenge to its legality.

The government promptly appealed the interim ruling but the court voted to keep the injunction in place on Tuesday pending a hearing on the issue.

The Makati Business Club, which groups together heads of top corporations, expressed "grave concern and disappointment with the Supreme Court's decision," which it described as "a big setback to the governments effort to raise revenues as part of its fiscal reform program."

It called for a swift resolution of the VAT issue "in order to avert a serious fiscal crisis from getting even worse in the near future."

Finance Secretary Cesar Purisima has said the government stood to lose P5 billion a month in revenues.

The ruling "comes at an urgent time when the country needs to put in place every revenue enhancement and cost management measure to plug an increasing budget deficit," the Makati Business Club said.

"On top of the revenue losses, the Supreme Courts decision once again sends negative signals to investors about the instability and unpredictability of economic policy and legislation."

Cora Guidote, investor-relations adviser to President Arroyo, said international ratings agencies Fitch and Standard and Poor's have "expressed concern about a prolonged delay" in the tax collection as it would "weaken the country's fiscal reform program, which, in turn, could erode investor confidence."

The Asian Development Bank said it was also poised to cut its growth forecast for the Philippines to below 5.0 percent this year amid setbacks to its fiscal reforms and soaring oil prices.

The Philippines is not on the brink of a financial crisis despite the economic problems and despite political turmoil that includes calls for President Arroyo to step down, said the ADB's country officer, Tom Crouch.

Stocks have taken a beating while the peso has tumbled to a near-record low following the Supreme Court's decision.

Crouch said the ADB in April predicted Philippines' economic growth would moderate to 5.0 percent in 2005 and 2006, but is likely to revise its projection down below 5.0 percent, given the fresh developments.

Gross domestic product expanded 6.1 percent last year, the highest rate in 15 years. But Crouch noted first-quarter growth this year already has slowed to 4.6 percent from 6.4 percent in the same period last year.

A slowdown in the world economy, softer demand for Philippines' exports, sustained higher global oil prices and rising international interest rates exacerbate the country's woes, he said.

"While the suspension of the e-VAT is a serious setback, it need not be totally debilitating," he said.

"Over the next few years, the economic challenges will remain the same -- fiscal consolidation, improving the investment climate, and improving governance. The need for deeper and sustained reforms remains dominant."

A local research group also warned that with the peso and stocks tumbling to their lowest levels in four years, a financial collapse could spell the end for the Arroyo administration before the year closes.

Presenting its midyear economic report, Ibon Foundation said the economic losses suffered due to the increasing calls for the President's resignation and protests over rising prices might succeed where the political opposition has failed.

"The fall of the peso is due to political reasons. The longer Ms Arroyo stays in power, the greater the danger for financial collapse," Ibon research director Antonio Tujan said in a press briefing.

"If the peso slides to 65, even the big businesses and the trade sector supporting her now will feel that it's too much to pay for the President to stay in power," Tujan said. With Inquirer wires and INQ7.net

VAT freeze to affect infrastructure spending

2005-07-07T07:25:00.000+08:00

VAT freeze to affect infrastructure spending
Business World Online

Aside from difficulties in reducing its debt, the government will also deal with having nothing to spend for development and infrastructure following the Supreme Court order freezing the new value-added tax (VAT) law, the Finance department yesterday said.

Assuming the government will only be able to implement the expanded VAT for two months as a result of the temporary restraining order issued by the high court, new revenues for this year will merely be half of the projected P20 billion, or P9.89 billion, Finance Assistant Secretary Gil S. Beltran said.

As a result, the emerging 2005 budget deficit is P170 billion instead of the earlier projection of P160 billion, he added. Without new VAT earnings, the budget shortfall will remain at the baseline P180 billion.

All new VAT collections were supposed to be spent for deficit reduction this year. Next year, 30% will be earmarked for capital expenditures, to be five percentage points every year until it reaches 50% by 2010.

Mr. Beltran warned that infrastructure spending could suffer next year without the VAT law as losses will be bigger. Additional collections next year have been pegged at P84 billion given a provision allowing the President to increase the tax rate to 12% from 10%. Opposition lawmakers claim this provision is unconstitutional.

In addition, the government is expected to lose P2.5 billion this year after it lowered the import duty on oil products to 3% from 5% to soften the expanded VAT’s impact on petroleum products, which were no longer exempted under the new law.

Mr. Beltran said Malacañang would recall the executive order to minimize losses.

The Finance department earlier said the restraining order would result in "unrecoverable losses" of P4 billion-P5 billion a month or P130 million a day based on VAT collection estimates.

Finance Secretary Cesar A.V. Purisima said the economy will become vulnerable to "global economic threats" without the new VAT law as the government’s fiscal position is "precarious."

He noted that the public sector deficit had exceeded 3% of gross domestic product (GDP) for six consecutive years and would breach that level again this year. A deficit exceeding 3% is considered "excessive" under European Union standards, he said.

Moreover, the country is close to becoming "severely indebted" under World Bank standards, with the present value of external debt at 80% of gross national income. Public debt is already 96.9% of GDP, exceeding the EU’s 50% threshold, Mr. Purisima said. -- Felipe F. Salvosa II

Court refuses to lift freeze on E-VAT law

2005-07-06T15:59:00.000+08:00

Court refuses to lift freeze on E-VAT law
First posted 09:08pm (Mla time) July 05, 2005
By Veronica Uy
Inquirer News Service, INQ7.net, Agence France-Presse

(2nd UPDATE) THE SUPREME Court on Tuesday refused to lift a freeze order on a controversial value added tax (VAT) law that has spooked financial markets, a court spokesman said.
But the court, which stopped the law from being implemented just hours after it went into effect last week, said it was bringing forward a hearing on the constitutionality of the legislation to July 14 from July 26.

The tax is a key reform initiative for embattled President Gloria Macapagal-Arroyo, who said Tuesday she would welcome impeachment so she can refute opposition allegations she cheated in last year's presidential elections.

Even opposition Senator Juan Ponce Enrile decried the court’s decision, saying it would be “injurious” to the Philippine economy.

“It impacts on our financial position and on the value of the peso,” he said.

The court however moved to expedite the resolution of the issue that is said to cost the government 130 million pesos in losses for each day that the E-VAT is not collected.

The Supreme Court gave those who challenged the law three days to respond to the government's petition.

Court spokesman Ismael Khan said that in effect, the Supreme Court's position had not changed on the freeze order.

"That's right, the TRO [temporary restraining order] remains," Khan said, when asked to interpret the court's resolution.

He noted the Court also did not require those who challenged the law to put up a bond of 130 million pesos (2.3 million dollars) daily until the case was decided as earlier requested by Purisima.

But Enrile argued the country is in dire need of funds from the expanded taxation system.

“Can the nation afford to wait that long? Can we wait to stop the drain in the finances of government? Can we wait to stop the salaries of everyone from the Supreme Court justices to the janitors and clerks in government? Can we wait to stop expenditures of public funds?

“Common sense dictates that we cannot and that we provide for the affairs of the nation,” he said.

Members of the political opposition had questioned certain provisions of the law, including one giving Arroyo unprecedented powers to increase the VAT rate to 12 percent by next year.

They also questioned a provision allowing independent power producers to pass on to their consumers the extra burden of the VAT.

The VAT law is a cornerstone of Arroyo's economic reform agenda and is expected to generate additional revenues that could help government address a chronic deficit and pay off debts.

Customs falls short of collection target

2005-07-06T15:48:00.000+08:00

Customs falls short of collection target
BY FELIPE F. SALVOSA II, Senior Reporter
Business World Online

The Bureau of Customs fell short of its collection target for the first half but still managed to post a 12.4% increase in revenues to P68.085 billion for the six-month period, data from the agency showed.

Collections for the first half were higher than last year’s P60.568 billion but were P4.422 billion short of the target of P72.507 billion.

For June alone, customs collections grew 17.6% to P12.255 billion from last year’s P10.424 billion. But versus the monthly target of P13.265 billion, this was 8.2% or P2.841 billion short.

Based on first-half collection data, the Customs bureau must generate P83.1 billion in revenues for the remainder of the year to meet its 2005 collection target of P151.185 billion.

The 2005 target is 23.4% higher than actual 2004 collections of P122.471 billion, although the new value-added tax (VAT) law could raise an additional P500 million, Customs Commissioner Alberto D. Lina said.

The Customs bureau accounted for 17.5% of government revenues last year, which reached P699.768 billion.

This year, the National Government hopes to collect P783.156 billion from the tax bureau, Customs, the Treasury, and other offices, and reduce the budget deficit to around P160 billion.

The new VAT law, frozen by the Supreme Court last July 1, was supposed to generate P28-P31 billion this year and P97-P105 billion next year, when the VAT rate is increased to 12% from 10%.

But a Finance department official told BusinessWorld the target had been lowered to P20 billion this year and P84 billion next year based on updated data and the removal of the 70% cap on input VAT, or VAT paid by businesses for production inputs, that can be deducted from output VAT, or VAT charged to customers.

"We revised it for accounting purposes," the official said.

Finance is willing to raise the cap to 90% through an amendment in the law upon the request of business groups and had postponed the implementation of the provision until the end of the year.

DOF to review property transfer taxes over past years

2005-07-05T07:42:00.000+08:00

DOF to review property transfer taxes over past years
By Des Ferriols
The Philippine Star 07/05/2005

The Department of Finance (DOF) said it will review estate taxes and property transfer taxes made over the last five to 10 years in an effort to determine whether real estate transactions of this nature have been taxed properly.

Finance Secretary Cesar V. Purisima said the DOF is reviewing even more tax measures to improve its revenue collection that would ultimately go towards further reduction of the national debt.

Purisima said the department was particularly concerned about the loopholes in the estate and property transfer tax which he said was not yielding as much revenues as it should.

According to Purisima, the DOF collected about P500 million worth of estate taxes in 2003 and about P700 million from property transfer tax.

"If we look at the land registration office, we find that this amount is far from the truth," he said. "We will have to review property tax payments over the past five to ten years."

Purisima also said earlier that tightening the collection of income taxes from self-employed individuals and professionals could generate up to P70 billion in incremental revenues.

Historically, the DOF said fixed income earners have always accounted for the bulk of the income taxes collected by the government, even if self-employed individuals and professionals earn significantly more than salaried employees.

Purisima said that in 2004, the government collected a total of P96 billion from individual income taxpayers and P84 billion of the amount was paid by fixed income earners whose taxes are automatically withheld.

In contrast, Purisima said self-employed individuals and professionals paid only P12 billion.

"Salaried employees pay their taxes because they have no choice," Purisima said. "With self-employed individuals and professionals, it’s voluntary."

If the Bureau of Internal Revenue is able to convince self-employed individuals and professionals that it is more costly to evade taxes, Purisima said the government could easily double its individual income tax collection.

"Assuming we can increase their income taxes to an average of P100,000 and with their estimated number of 700,000, that’s easily P70 billion to start with," Purisima said.

According to the National Tax Research Center (NTRC), the BIR collected only an average of about 30 percent of the amount that should have been paid by professionals and self-employed individuals.

Concepcion urges Congress to repeal EVAT law

2005-07-05T07:41:00.000+08:00

Concepcion urges Congress to repeal EVAT law
By Marianne V. Go
The Philippine Star 07/05/2005

Industrialist and consumer advocate Raul T. Concepcion is asking Congress to repeal the expanded value added tax (EVAT) law when it convenes on July 24, to eliminate objectionable provisions which the Surpreme Court (SC) may find unconstitutional.

Specifically, the objectionable provisions include allowing the President to increase the VAT rate from 10 percent to 12 percent and increasing the corporate income tax from 32 percent to 35 percent.

According to Concepcion, "under the Constitution, all tax measures must originate from Congress."

However, Concepcion urged Congress to pass a new EVAT Law within the first 45 days of Congress otherwise, it would be up to the SC to decide on the EVAT issue.

The SC last week had issued a temporary restraining order (TRO) on the implementation of the EVAT.

The High Court is expected to hear oral arguments in the next 10 to 15 days and issue a decision soon after.

Thus, if Congress does not remedy the EVAT themselves, the SC may come out with its decision ahead on the issue, Concepcion said.

Concepcion acknowledged that without a workable EVAT, there could be "dire consequences" for the economy.

These consequences include a rapid peso deterioration, a credit downgrade which would cost the country billions of pesos in additional debt servicing and loss of investor confidence.

The adverse economic consequence of not having a workable EVAT, combined with the already uneasy political situation, Concepcion warned, "may create a tinderbox of horrific potential."

In a related development, Concepcion expressed his support for a proposed " one final tax amnesty."

The proposed tax amnesty would involve the filing by all taxpayers of a statement of assets and liabilities (SAL).

Based on the SAL, taxpayers could file a tax return using an amnesty rate of between 20 percent and 25 percent.

Those who avail of the tax amnesty, Concepcion said, would be exempt from tax investigation.

The proposed tax amnesty, Concepcion said, would help expand the taxable tax base as virtually all the assets of the entire nation would be the basis of determining if correct taxes are paid and the determination of the inheritance tax on the estate of the deceased.

NG debt down to P3.867T in April

2005-07-05T07:40:00.001+08:00

NG debt down to P3.867T in April
By Des Ferriols
The Philippine Star 07/05/2005

The total debt of the National Government dropped slightly from P3.869 trillion in March to P3.867 trillion in April due to the appreciation of the peso and small net repayments from various loans.

The Bureau of Treasury (BTr) reported yesterday that foreign loans accounted for 47 percent of total outstanding debt, amounting to P1.803 trillion while domestic loans accounted for 53 percent or P2.064 trillion.

The BTr said domestic debt rose 0.23 percent or P4.8 billion from the March level due to net issuances of government securities.

On the other hand, the BTr said the month-on-month decline in the NG’s foreign debt of P7 billion was due to a P12-billion net appreciation of the peso against the dollar and the P2-billion net repayments from loans.

The decline in foreign debt, according to the BTr, was partly offset by the depreciation of third currencies against the dollar which had the effect of increasing the foreign debt by P7 billion.

The BTr has made significant accounting adjustments to the total NG debt number, removing the assumed debt of the National Power Corp. (Napocor) that officials said were previously double-counted.

National Treasurer Omar Cruz said official NG debt data released since January included some P196 billion worth of Napocor debt that had been absorbed by the National Government, bringing the total to a little over P4 trillion.

According to Cruz, however, the Napocor debt that had been loaded into the NG debt should not have counted as incremental debt since these were already reflected in the NG debt figures from the start.

"Simply put, the NG incurred the foreign debt and re-lent the proceeds to Napocor since it could not go directly to the market to raise funds for itself," Cruz explained.

The Napocor then issued bonds to the NG in exchange for the borrowing and the bonds were booked as assets of the NG. The Napocor continued to service these borrowings and the NG in turn serviced its foreign borrowing from the proceeds of Napocor’s payments.

Since the Napocor was no longer able to service the debt, Cruz said the NG decided to write it off by canceling the Napocor bonds from its books.

"In effect, we had to assume Napocor’s debt and then cancel the bonds that are in our books as assets," he said. "So the net result is a wash transaction. That debt should never have been booked twice in the first place."

Budget surplus seen in June, but higher tax collections in jeopardy

2005-07-05T07:40:00.000+08:00

Budget surplus seen in June, but higher tax collections in jeopardy
By Des Ferriols
The Philippine Star 07/05/2005

The government is expecting a budget surplus in June, its second this year, but analysts saw a Supreme Court (SC) freeze on major tax reform clouding prospects for the rest of 2005.

The government gave hints of it June performance as stocks and the peso slumped yesterday after the Supreme Court on Friday halted, pending hearings, an expanded value added tax (EVAT) that is at the heart of government efforts to cut its budget deficit.

National Treasurer Omar Cruz told reporters yesterday that the emerging June numbers "looked good" due to the combined effects of the improvements in revenue collection as well as tight expenditure controls.

"We might be looking at our second monthly surplus for the year," Cruz said. "We are ahead of our targets for the first semester of the year but of course we have to see the rest of the year. We need to clear the way because there is a lot of things that stand in the way of the rest of our targets going forward."

In the first five months of 2005, the budget deficit was P67.8 billion, 12.4 percent lower than the shortfall of P77.4 billion in the same period of 2004 and only 70 percent of the official target for the first six months.

Research firm 4Cast said a budget surplus in June would mean the government was on track to beat its shortfall target of P98.5 billion for the first half.

Finance Secretary Cesar Purisima said the government would ask the court to lift the freeze later on Monday. "We estimate that the potential lost for every day of delay is about P150 million to P160 million," Purisima.

"We are hoping that the TRO would be imposed not on the whole VAT law but only on the portions specifically opposed by the petitioners," Purisima said. "The new VAT law is a comprehensive measure and hopefully, we will be able to implement the parts that were not covered by the petition."

The new VAT law ended the exemptions enjoyed by some industries, such as power, electricity, air and sea transport. Implementation of the VAT effectively resulted to increases in the price of fuel, electricity, toll rates and airline travel.

The VAT also increased corporate-income tax to 35 percent from 32 percent and lowered the VAT cap from 90 percent to 70 percent, effectively increasing the VAT payments of business enterprises.

The new VAT law would have generated at least P30 billion in incremental revenues for the Arroyo administration this year and about P80 billion in 2006.

According to Cruz, the January to June fiscal performance will be unaffected by the TRO on the VAT but the rest of the government’s fiscal consolidation program would be at risk from hereon unless the law is finally cleared for implementation.

Government asks SC to lift EVAT law suspension

2005-07-05T07:38:00.000+08:00

Government asks SC to lift EVAT law suspension
By Jose Rodel Clapano
The Philippine Star 07/05/2005

The Department of Finance (DOF), the Bureau of Internal Revenue (BIR) and Executive Secretary Eduardo Ermita separately asked the Supreme Court (SC) yesterday to immediately lift the temporary restraining order (TRO) it issued last week to block implementation of Republic Act (RA) 9337, or the Expanded Value Added Tax (EVAT) Law.

Acting quickly to restore the flow of revenues from the expanded tax measure, Malacañang expressed confidence that the SC would recognize the wisdom of implementing the EVAT.

In an urgent 50-page motion seeking to lift the TRO, Finance Secretary Cesar Purisima, BIR Commissioner Guillermo Parayno Jr. and Ermita also asked the SC to require the opposition congressmen led by House Minority Leader Francis Escudero and the Petroleum Dealers Association to pay a hefty P130-million bond per day if the government’s motion to lift the order on the EVAT law is denied, until final resolution of the case.

The EVAT law had been in effect less than a day before the SC issued the TRO at the urging of Escudero and others.

Purisima, who led in filing the motion before the SC, said "the suspension of the implementation of RA 9337, albeit still temporary, endangers the country’s fiscal capability."

He said the government loses a potential P130 million in revenues for every day that the TRO is in effect.

"This will frustrate our efforts to bring down our budget deficit from P187 billion to P160 billion by the end of the year. With the new VAT law in force, we expect to wipe out our budget deficit by 2008," Purisima said.

"Delays in (the EVAT) implementation would derail, if not endanger, our fiscal consolidation efforts," he said. "The sooner we resolve this issue the better for all of us."

Purisima cited the argument of Chief Justice Hilario Davide Jr., who along with Justice Reynato Puno voted against the TRO, that the collection of taxes could not be prohibited, being the lifeblood of the nation.

He said that mere allegations of unconstitutionality of a tax law does not warrant the issuance of a TRO to enjoin its enforcement, adding that RA 9337 enjoys the presumption of constitutionality.

"The irreparable damage, if at all, that petitioners (Escudero et al) may sustain is far less than the untold pecuniary damage which the government and the people it serves will suffer as a result of the TRO," Purisima said.

Purisima said the SC, in its ruling on the case of Southern Cross Cement Corp. vs Philippine Cement Manufacturers Corp., declared that Section 218 of the Tax Reform Act of 1997 "prohibits any court from granting an injunction to restrain the collection of any national internal revenue tax, fee or charge imposed by the Internal Revenue Code.

Press Secretary Ignacio Bunye said in a statement that the EVAT law was meant to provide economic stability as he underscored the legality of the tax measure.

"We will plead with the high court to reverse its decision," Bunye said, adding that the country cannot afford any further delays in the implementation of the EVAT. Huge deposit
Purisima said the power to block the collection of taxes is not treated lightly and the law requires that when the Court of Tax Appeals exercises this power, it must require the taxpayer to deposit the amount claimed by the government to file a surety bond for not more than double the amount.

"RA 9337 enjoys the presumption of validity. This presumption obtains until its assailants prove its unconstitutionality, beyond a reasonable doubt. It is but a decent respect to the wisdom, integrity and patriotism of the legislative body, by which any law is passed, to presume in favor of its validity, until its violation of the Constitution is proved beyond a reasonable doubt" Purisima said.

He calculated that, from the first day of July 2005, when the EVAT went into effect, until the end of this year, the national government stood to collect incremental revenues of P25 billion to P28 billion. "Losses to the national government for each month that RA 9337 is not implemented will run to around P4 billion to P5 billion. Each day that the TRO exists will cost the national government revenues in excess of P130 million," he argued.

Purisima said these daily losses would be unrecoverable: "Not even any eventual decision of (the SC) upholding the validity of the RA 9337 will allow the BIR or the DOF to collect value-added taxes accruing to the transactions during the time the TRO is in effect.

"The very issuance of the TRO has already put respondents’ collection projection, and hence the deficit reduction program, off-track, albeit (at the time of filing this motion) at still manageable levels. An early lifting of the TRO will only serve to limit the Republic’s losses," Purisima said.

He said the injuries that Escudero and the Petroleum Dealers Association had claimed they would suffer could be mitigated through prudent business decisions or through the remedies provided for under the Tax Code.

"Any additional VAT that such petitioners will pay pursuant to RA 93237 may be returned to them should this honorable court hold that such collection was illegal due to the invalidity of RA 9337," Purisima said.

"In the event that this honorable court sustains the issuance of a TRO against RA 9337, respondents request that the (SC) require (the) petitioners to file the appropriate bond to cover the unrecoverable tax losses during the pendency of this case conditioned on this court sustaining the validity of RA 9337 pursuant to Section 4 (b) Rule 58 of the Revised Rules of Court.

"The TRO will inflict greater damage on the Republic. Perforce, it is respectfully submitted that the TRO must be lifted immediately," he added.

Voting 13-2, the SC stopped the implementation of the EVAT, with Davide and Puno voting against the issuance of the TRO.

SC Justices Angelina Sandoval-Gutierrez, Renato Corona and Antonio Carpio called by long distance from Madrid and conveyed their votes for the issuance of the TRO.

Justices Consulelo Ynares-Santiago and Alicia Austria-Martinez conveyed their votes for the issuance of the TRO via cellular phone. Hope for reconsideration
Meanwhile, administration lawmakers House Deputy Speaker for Mindanao Gerry Salapuddin and Bacolod City Rep. Monico Puentevella (Lakas) also asked the SC to lift the TRO on the EVAT.

According to them, the implementation of the EVAT is vital to the country’s survival and its non-implementation is expected by economists to be "brutally detrimental" to financial markets.

Citing the warning of University of the Philippines (UP) economics professor Ernie Pernia, Salapuddin said the impact of the TRO is "terribly adverse" due to the loss of revenue that could be used to ease the country’s financial burden.

Salapuddin took exception to claims made by members of the opposition that the EVAT was merely crafted to increase the burden on the public: "This (claim) is illogical and downright ridiculous. They have overplayed this argument too long."

He said the EVAT law was the product of a long legislative process, incorporating the best proposals from the administration and opposition: "Of course, there would always be political leverage banking on the unpopularity of the legislation. Nobody loves new taxes."

Puentevella said the EVAT law is the centerpiece of the government’s economic reforms and, without the tax legislation, all the government’s other reform programs will be rendered useless to plug the fiscal deficit.

He also expressed dismay over remarks made by Senate Minority Leader Aquilino Pimentel Jr., who said the President would be digging her own political grave if she pushes for the implementation of the EVAT.

"The President has long prioritized national economic recovery over political considerations," Puentevella said. "She is not afraid to make the tough choices no matter how unpopular they are."

He said instant but temporary solutions cannot help the country achieve economic stability: "We have to start thinking in the long-term and this entails work and sacrifice. This is the only way to make our economic gains permanent." Both good and bad
Opposition Sen. Edgardo Angara said the TRO on the EVAT is both good and bad news, adding that the positive aspect of the TRO is that it "provides a breathing spell for the court to review the provisions" of the law.

RA 9337 had been the subject of debate by all sectors because of a number of provisions — including the removal of exemptions for power and petroleum and the hike in the corporate income tax — before it was signed by President Arroyo on May 24.

However, the petitions raised by both the House and the Senate focused mainly on the constitutionality of the standby authority granted to the President to raise the EVAT rate by two percent next year.

Angara said the petitions would fail if the only issue raised is the constitutionality of the standby authority.

Under RA 9337, the President "shall" upon the recommendation of the Secretary of Finance, raise the EVAT rate to 12 percent on January 1, 2006 after any of the following conditions are satisfied: VAT collection as a percentage of gross domestic product of the previous

year exceeds two and four-fifths percent or the national government deficit as a percentage of GDP of the previous year exceeds one and a half percent.

"The increase in rate is not left for the President to decide. It is mandatory. The delegation is already fixed. The judgment is exercised by the legislature. The delegation is complete," Angara said.

He said that what should have been challenged in the law were the hike in the corporate income tax rate of three percent and the cap on input tax credits of 70 percent.

Angara also said the hike in the corporate income tax rate is not germane to the subject matter of the EVAT and should not have been included in the first place.

The negative aspect of the TRO relates to its impact on the fiscal condition of the country: "The bad news is that this is the single biggest source of revenue for the government. The longer you delay, the worse for the fiscal condition of the country. I appeal to the Supreme Court to act speedily and not look at it as a single tax measure." — With Marvin Sy

S&P: High court's VAT ruling has no impact on ratings yet

2005-07-05T07:35:00.000+08:00

S&P: High court's VAT ruling has no impact on ratings yet
Posted: 1:33 AM Jul. 05, 2005
XFN-Asia with Inq7.net

STANDARD & Poor's Ratings Services on Monday said the Supreme Court's decision stopping the implementation of the new value-added tax (VAT) law had no immediate consequences on the Philippines' credit-ratings.

But it warned that it might be constrained to downgrade its "stable" outlook on the Philippine rating if the implementation of the VAT suffered excessive delay or be abandoned altogether. "By delaying much needed fiscal consolidation, it adds to the country's external vulnerability at a time when a less favorable global environment and the ongoing political crisis surrounding the president have combined to heighten risk perceptions toward the country," S&P said in a statement.

President Gloria Macapagal-Arroyo is facing an impeachment complaint and there have been calls for her resignation amid allegations that she cheated her way to victory in last year's election and that some members of her family were involved in illegal lottery operations.

S&P said the Philippines' ratings have been supported by adequate external liquidity and stable foreign reserves, which could be eroded by any major setback to fiscal consolidation.

S&P said the Supreme Court's decision "again highlights the difficulty of implementing fundamental reforms" in the country "where policy making is prone to derailment by a highly politicized and fragmented legislature, and the pervasive influence of vested interests."

"This will further erode confidence in the administration's ability to address its fiscal deficit problem," it said. "These developments could jeopardize the improvement in revenue collection witnessed over the past year, and thus undermine the fiscal consolidation process -- the primary policy objective of the current administration." With INQ7.net

Budget surplus expected for June

2005-07-05T07:34:00.000+08:00

Budget surplus expected for June
Posted: 1:38 AM Jul. 05, 2005
Doris C. Dumlao
Inquirer News Service

THE GOVERNMENT is expected to record a budget surplus in June, after a P7.6-billion deficit in May, due to more cautious spending and higher revenue collection, National Treasurer Omar Cruz said Monday.

Citing preliminary figures from the Bureau of Internal Revenue (BIR), Cruz said the government likely over-performed against its target of a P12-billion deficit in June. He said the June performance would likely replicate the surplus recorded in April.

"We are almost P29 billion ahead [of budget target] for the entire semester," he told reporters. Since February when he took over the helm of the Bureau of Treasury, Cruz said, the government's borrowing cost had gone down by about P10 billion.

Revenue collection has also improved with the BIR's aggressive crackdown on tax evaders.

But Cruz admitted that the Supreme Court's suspension of the implementation of the value-added tax (VAT) was a big stumbling block for the government.

The VAT suspension is expected to result in about P5 billion in forgone revenue every month, according to BIR estimates.

Acknowledging that the Supreme Court ruling would be a big blow to sovereign creditworthiness, Cruz said it was fortunate that the government had pre-funded some of its foreign borrowing requirements for the year.

The government recorded a budget deficit of P7.6 billion in May, down from P12.7 billion a year earlier.

In the January-May period, the budget deficit amounted to P67.8 billion, down 12.4 percent from P77.4 billion in the same period last year and equivalent to 70 percent of the government's target ceiling for the January-June period. With INQ7.net

Revenue goals may need revising

2005-07-05T07:18:00.000+08:00

Revenue goals may need revising
With court order freezing VAT implementation
BY JUDY T. GULANE, Reporter, and JUN P. TAGALOG, Correspondent
Business World Online

The Department of Finance might need to revise revenue projections from the expanded value-added tax (VAT) in case it takes a while before the Supreme Court (SC) lifts its temporary restraining order (TRO).

Finance estimates peg revenue projections from Republic Act 9337 or the Expanded Value-Added Tax Act of 2005 at P20 billion this year and P84 billion next year. Revenue losses as a result of the TRO are estimated at P150-P160 million a day or P4-P5 billion monthly.

SC spokesman Ismail Khan said over the weekend that after the oral arguments set on July 26, it will take the High Tribunal two to three weeks to come out with a ruling.

"There is a possibility we will have to adjust our numbers but we will definitely work doubly hard so as not to have an impact on our fiscal consolidation program," Finance Sec. Cesar A.V. Purisima told reporters yesterday.

The Finance department will continue its privatization program and aggressively collect taxes, go after smugglers and manage expenditures especially in government-owned and -controlled corporations, he said.

He added that government is intent on convincing the SC to lift the freeze on items that are germane to the law, such as the repeal of the exemption of oil and fuel, doctors and lawyers, and cooperatives, since these were not questioned in the petitions filed before the high tribunal.

"Clearly, at worst, we would like to hope the restraining order would just be on the items being questioned -- which is the authority delegating the president the power to increase it," Mr. Purisima said.

In Cebu City, Internal Revenue Commissioner Guillermo L. Parayno, Jr. suggested that only three provisions of the law be suspended: the 70% cap on creditable input VAT, the power of the President to increase the rate to 12% next year and amendments to income and excise taxes.

Suspension of the entire law, he said, "will create much more damage to the economy."

"We got at least an adjustment in the outlook by the rating agencies or at least the status quo primarily because this law was passed," Mr. Parayno said at the sidelines of a consultation here on the VAT law.

"Our calculation is that it’s better to bite the bullet by observing this law rather than us not being able to generate the necessary revenues to pay off our maturing obligations. It’s a choice that we have to make," he said.

The issuance of the temporary restraining order, he said, has given the Bureau of Internal Revenue (BIR) an additional work load. BIR personnel now have to re-encode the agency’s computers to remove companies from the list of entities that should pay the VAT, else they be tagged as tax evaders. -- with a report from Reuters

Tighter tax collection from professionals, entrepreneurs to bring in add’l P70B — DOF

2005-07-04T15:53:00.000+08:00

Tighter tax collection from professionals, entrepreneurs to bring in add’l P70B — DOF
By Des Ferriols
The Philippine Star 07/04/2005

Tightening the collection of income taxes from self-employed individuals and professionals could generate up to P70 billion in incremental revenues, the Department of Finance (DOF) said.

Historically, the DOF said fixed income earners have always accounted for the bulk of the income taxes collected by the government, even if self-employed individuals and professionals earn significantly more than salaried employees.

Finance Secretary Cesar V. Purisima said that in 2004, the government collected a total of P96 billion from individual income taxpayers and P84 billion of the amount was paid by fixed income earners whose taxes are automatically withheld.

In contrast, Purisima said self-employed individuals and professionals paid only P12 billion.

"Salaried employees pay their taxes because they have no choice," Purisima said. "With self-employed individuals and professionals, it’s voluntary."

If the Bureau of Internal Revenue (BIR) would be able to convince self-employed individuals and professionals that it would be more costly to evade taxes, Purisima said the government could easily double its individual income tax collection.

"Assuming we can increase their income taxes to an average of P100,000 and with their estimated number of 700,000, that’s easily P70 billion to start with," Purisima said.

According to the National Tax Research Center (NTRC), the BIR collected only an average of about 30 percent of the amount that should have been paid by professionals and self-employed individuals.

The NTRC conducted random sampling of professionals such as doctors, lawyers and artists, to create a baseline of the taxes paid to the BIR for their annual income.

"We found doctors working in high-end hospitals who reported annual income of P90,000," said NTRC director Lina Isorena. "How are we supposed to believe that?"

Isorena said the NTRC is in the process of analyzing sample returns from professional and self-employed individual taxpayers to find out what deductions they have been claiming and how the loopholes could be plugged.

According to Isorena, the tax gap estimates are conservative, since the government has no idea exactly how many active professionals and self-employed individuals are practicing in the country.

"Admittedly, this is the hard-to-tax group in any country," Isorena said. "While it is true that overstatement of expenses and understatement of income is widespread, they do have legitimate expenses that can be legitimately claimed for deductions. The critical part is to sort it all out."

Gov’t confident SC will uphold legality of EVAT law

2005-07-04T15:51:00.000+08:00

Gov’t confident SC will uphold legality of EVAT law
By Paolo Romero
The Philippine Star 07/04/2005

Malacañang is optimistic that the Supreme Court (SC) will uphold the legality of the expanded value-added tax (EVAT) law, officials said yesterday.

In an interview, Executive Secretary Eduardo Ermita denied allegations that Malacañang had a hand in the high tribunal’s issuance of a temporary restraining order (TRO) indefinitely suspending the implementation of the EVAT.

Reports said this was done as a political move to stave off Filipinos’ growing disenchantment with the Arroyo administration.

"That’s not true. We do not interfere with the judiciary and we were equally surprised and disappointed with the TRO but that’s the way it is," Ermita said.

He added that Malacañang still believes the EVAT "will be upheld because this has been deliberated upon for so long by legal and economic experts both in Congress and in the executive branch."

Press Secretary Ignacio Bunye said President Arroyo is confident the TRO would be lifted soon as the SC recognizes that the EVAT law, otherwise known as Republic Act 9337, is the main instrument to address the country’s fiscal woes and fund the government’s cash requirements.

The President earlier vowed to defend the law with the same vigor she showed pushing for the tax’s passage in Congress.

Bunye said the Office of the Solicitor General, along with the Department of Finance, will file a motion before the high tribunal today seeking to have the order lifted.

"We believe the SC would recognize that this is a very vital law," he said in a radio interview.

Bunye clarified that whatever taxes were collected during the initial implementation of the EVAT law last Friday would still have to be remitted to the Bureau of Internal Revenue.

Budget Secretary Emilia Boncodin echoed the Palace officials’ statements, saying the EVAT "is something that we can easily defend."

Boncodin, however, warned the TRO would affect the government’s deficit projections for the year. She said the government had earlier projected a P180-billion deficit for 2005 before the EVAT law was enacted.

With the new taxes, it was believed that the deficit could be reduced to P160 billion as the EVAT could raise some P20 billion from July to December, she said.

"If this (TRO) takes too long, it will derail our fiscal reforms and the funding of the projects already lined up because of the EVAT," she said.

Finance Secretary Cesar Purisima earlier warned the government could lose P160 million for each day that the TRO remained in effect. The revenue losses could reach P5 billion in one month, he said.

For his part, Senate President Franklin Drilon appealed to the high tribunal to resolve the issue involving the constitutionality of the EVAT law soon, adding that further delays in the implementation of the EVAT would affect the country’s economy.

He left it to the Palace to determine the extent of the "damage" that the temporary suspension of the EVAT could bring to the economy.

The President has prioritized the passage of the EVAT law in a bid to address the country’s worsening financial crisis. She has vowed to seek a reconsideration of the decision to get the country’s fiscal agenda in order.

Meanwhile, Senate Minority Leader Aquilino Pimentel Jr. urged the Bureau of Internal Revenue and the Bureau of Customs to concentrate their efforts on the approximately 30 percent of VAT that remain uncollected each year. Last year, this percentage translated into P65 million in actual uncollected VAT.

He said the Arroyo administration is only digging its own political grave if it goes ahead with increasing the VAT rate from 10 to 12 percent next year, as provided for in the EVAT law, which expanded the coverage of the tax to include petroleum products, power, airplane and shipping fares.

"If the people could hardly cope with the rising prices of goods and services, aggravated by the 10 percent VAT, you could imagine the intolerable sufferings they will face once VAT is jacked up to 12 percent. Political and social analysts agree that this could be a prescription for a social revolt," Pimentel said. ‘No Need For EVAT’
The government does not need the expanded value-added tax (EVAT) and can wipe out the budget deficit from existing revenue sources, according to the opposition in the House of Representatives.

"Proof of that is the statement of Budget Secretary Emilia Boncodin that with the Supreme Court restraining order on the EVAT law, the administration will have to raise additional money from existing sources," Minority Leader Francis Escudero said yesterday.

He said revenue collections have been increasing largely due to the efforts of Commissioner Guillermo Parayno of the Bureau of Internal Revenue (BIR) and his people to improve their performance.

"Commissioner Parayno’s all-out campaign against tax evaders is paying off. The administration should have started this on Day 1 of the Arroyo presidency four years ago," Escudero said.

He pointed out that aside from the campaign against tax evaders, the BIR has been trying to collect deficient taxes from businessmen covered by the present 10 percent VAT.

"In fact, BIR officials have announced that they have collected nearly P10 billion in additional VAT by just matching the sales declarations of VAT-covered enterprises with their VAT payments and without actually auditing these establishments. They could have collected more if an audit was done," he added.

Escudero emphasized that the BIR can clearly collect its VAT collection deficiency that a research paper written by Negros Oriental Rep. Herminio Teves, vice chairman of the House ways and means committee, estimated at P117 billion in 2004.

In that paper, Teves said the gross sales that the 161,536 VAT-covered enterprises declared last year amounted to P4.039 trillion.

At 10 percent, the gross VAT due from these establishments was P403.9 billion, but these businesses claimed "input VAT" or refunds amounting to P213.91 billion, he said.

Thus, the amount of VAT that should have been paid was about P190 billion. However, the BIR collected only P72.89 billion, or a deficiency of P117.1 billion, Teves said.

Escudero said if this deficiency alone is collected, there would be no need for EVAT "since EVAT is expected to bring in only P80 billion, the amount that the President has asked from Congress in terms of revenue measures."

He said aside from improving tax collection, the administration should launch an honest-to-goodness campaign against corruption which various studies have found out is depriving the government of at least P100 billion a year.

"The so-called all-out war against corrupt officials is just pakitang tao (for show)," he stressed.

As for the claim of Finance Secretary Cesar Purisima that the Supreme Court’s restraining order on the EVAT law means that the government would lose P5 million monthly collections, Escudero said "it is a case of the glass being half-full or half-empty."

"I would rather look at it this way: the Supreme Court order allows the people, most of them poor, to keep their P5 billion in their pockets and spend it on basic necessities instead of the government taking it away from them, and instead of corrupt officials stealing it. P5 billion a month means a lot for our people," he said.

The high court handed down the order upon petition by Escudero and his colleagues in the House minority who are challenging the constitutionality of the EVAT law.

A separate petition has been filed by Senate Minority Leader Aquilino Pimentel Jr. and several opposition senators. — Jess Diaz, Christina Mendez

No Free Lunch: From crisis to crisis

2005-07-04T15:48:00.000+08:00

No Free Lunch: From crisis to crisis
Posted: 6:03 PM Jul. 03, 2005
Cielito Habito
Inquirer News Service

Published on Page B2 of the July 4, 2005 issue of the Philippine Daily Inquirer

IT WAS all a matter of time. That we are in yet another political crisis comes as no surprise to most of us; the question was simply one of timing. A few months ago, in their "Beneath the Fiscal Crisis" paper, Ateneo economists described our country to be perennially muddling through from crisis to crisis, and never quite getting anywhere. True enough, here we are again. While we have yet to extricate ourselves from a debilitating fiscal crisis, we are now in the midst of another, potentially more debilitating crisis, a political one. And yet only the most unperceptive and indifferent among us wouldn't have expected it to come sooner or later.

Simmering volcano

Basic inequities and disparities in our economy and society have not only persisted, but have in fact further widened through the passage of time, turning our nation into the social volcano that many describe our society to be. The pressure has constantly been building up, occasionally vented off by small upheavals like Edsa 1 and Edsa 2, but not quite dissipating the mounting pressure as even these upheavals left the underlying social, economic and political structures and circumstances largely unchanged. The Ateneo paper described the economic structures that have perpetuated the wide gaps in our society. It spoke of the economic powers in our midst who through the years have propped up the holders of political power, who in turn helped the former to deepen and widen their hold on business and the economy. Today, it is these same forces arguing vigorously for the status quo--even if it means forsaking truth, justice and righteousness--on the strength of the argument that we cannot risk "destabilizing" the economic and business environment with another change in the country's leadership. Some 13 months ago, these same forces chose to look the other way as countless votes were either being disenfranchised or stolen outright. The important thing then, as it is now, was to preserve the status quo under a leadership perceived to be friendly to their interests. Thus, the wiretapping scandal is to them nothing more than an annoying distraction that makes it harder to keep the truth under the rug for the sake of preserving "economic stability."

What troubles me about this attitude is the way it fails to realize that in the end, economic stability can not be durable unless it is built on truth, fairness and righteousness. The stability that current advocates for the status quo are trying to protect simply cannot last. It will only be a matter of time before we fall into yet another crisis. Besides, this "stability" being protected is largely illusory. In my dictionary, an ongoing fiscal crisis and an inflation rate approaching double-digits hardly describe economic stability.

Unity is key

I often ended my speeches in the 1990s with the imagery of a banca whose occupants must row in unison and in the same direction in order to surge forward; otherwise, if everyone rows in different directions, our national banca would just keep spinning aimlessly in the water. It is this unity, this spirit of oneness as a nation, that has constantly eluded us.

But our social, economic and political divisions as a people seem to run so deep as to make such oneness an impossible dream. In her "I am sorry" message to the country, the President reiterated her recurrent plea for unity under her leadership in facing our collective challenges as a people. The message is right; unfortunately, the proponent is not. It is impossible to find unity under a leader who has lost the confidence of the majority of Filipinos, as borne out by respectable surveys--and that was even before the wiretapping scandal broke out.

Who should bear the message of unity, then? It is equally impossible for our people to find unity behind a leader widely perceived to be of questionable integrity and to have links to illegal activities. Nor is it possible to find unity behind a leader widely seen to lack the competence for the role, or seen to be subject to control and manipulation by powerful vested business and political interests. And yet, these are apt descriptions for the most prominent alternatives being bruited about, save for one.

Unity in faith

At this time when people have allegedly grown tired and skeptical of extra-constitutional means to change our leadership, but where the constitutional alternatives are largely unacceptable and unlikely to bring about much-needed unity, there is a creeping feeling of helplessness and desperation in our national situation. "Is there hope for our country?" is a question I constantly get asked by people who seem to think I could answer it better than they could. Can we ever find the elusive unity we all need in order to move forward?

To my mind, there are two things that clearly unite us Filipinos. The first is our unswerving faith in God, a faith that transcends religions. The second is our deep concern for the welfare and future of our children. The key to overcoming our current predicament does not lie in any man or woman, then, but in these things that unite us all.

In this time of seeming national desperation, when none of the apparent alternatives seems appealing or acceptable, there is one clear recourse, and that is prayer. In time of great distress, even the most hardened agnostic ultimately turns to prayer in desperation (I have even witnessed professed atheists do so!). Similarly, the one thing that will see us through our current crisis is collective, incessant prayer as a nation. God has never, and will never turn His back on one who has humbled himself in prayer; God always makes a way. What more when an entire nation unites in doing the same.

Petron gets tax perks for P9B worth of projects

2005-07-04T15:41:00.000+08:00

Petron gets tax perks for P9B worth of projects
Posted: 6:20 PM Jul. 03, 2005
Ronnel W. Domingo
Inquirer News Service

Published on Page B1 of the July 4, 2005 issue of the Philippine Daily Inquirer.

THE BOARD of Investments has granted tax incentives and other perks for three projects of local oil giant Petron Corp. worth a total of P9.4 billion.

Documents from the BOI showed that the country's biggest oil firm was given incentives under the 2004 Investment Priorities Plan for a P3.3-billion manufacturing facility for benzene and toluene; a P4.82-billion propylene plant, and a P1.61-billion plant for the production of mixed xylenes.

Benzene and toluene are both found in gasoline and are used in the manufacture of plastics, detergents, pesticides and other chemicals.

Aside from being used to make dynamite, toluene--like mixed xylenes--is used to make solvents in paints, paint, thinners, rubber, printing, adhesives, lacquers, leather tanning and disinfectants.

Toluene and propylene are both used to produce resins. Those made from toluene are used in the construction, automotive and appliance industries while those made from propylene are used in food packaging, textiles and laboratory equipment.

According to the BOI, the benzene and toluene facility as well as the mixed xylenes plant were given pioneer status, which entitles them to an additional two years of income tax holiday on top of the regular four years.

Aside from income tax holiday, BOI-registered projects enjoy duty-free importation of capital equipment and other fiscal and non-fiscal perks.

The mixed xylenes plant is not considered a new export producer as Petron is already operating a facility for recovering the compounds in its refinery in Bataan.

The biggest project is expected to produce 13,770 metric tons a year of benzene and 114,300 MT of toluene a year.

The planned propylene facility will have a capacity of yielding 135,900 MT a year while the new mixed xylenes plant will turn out 126,000 MT annually.

Asked for more details, Petron officials said the company still had to make engineering and procurement efforts for the proposed projects and that these still needed final approval by the management.

If the benzene and toluene plant projects would push through, Petron plans to finance it with P992 million in equity and P2.3 billion in debt.

The proposed projects were lined up after the oil refiner invested at least $100 million in facilities that would lower the harmful contents of gasoline and diesel as required by the Clean Air Act.

Gov’t appeal expected today vs high court’s VAT restraining order

2005-07-04T15:32:00.000+08:00

Gov’t appeal expected today vs high court’s VAT restraining order
Business World Online

A Supreme Court decision to suspend the implementation of the expanded value-added tax law is a "serious setback" to the government’s plan to consolidate its finances and will cost P4-P5 billion a month or P130-P165 million a day in lost revenues, the Finance department warned.

Finance Secretary Cesar A.V. Purisima said the government would appeal "first thing Monday morning" to have the temporary restraining order (TRO) lifted. Press Secretary Ignacio R. Bunye said the same thing in a radio interview yesterday, declaring that the Office of the Solicitor General will not wait until the end of 10 days it has been given to file its motion.

"The President believes the law is an important component in our fiscal reform plan. It is aimed at addressing the budget deficit and the constant lack of funds for basic services. While unpopular, it will ultimately be good for the country. That is why the government will defend the law," he added.

The high court TRO, issued late on Friday, the first day of the law’s implementation, came as a result of two separate cases against Republic Act (RA) 9337. One was filed by a group led by the Association of Pilipinas Shell Dealers and the other by opposition lawmakers headed by Sorsogon Rep. Francis Joseph G. Escudero, the House minority leader. Lawmakers are questioning a provision in the law allowing the President to increase the VAT rate to 12% from 10% next year if the budget deficit and VAT collections exceed 1.5% and 2.8%, respectively, of gross domestic product.

On Friday, Mr. Purisima said the Supreme Court TRO was a disappointment and had caught the department by surprise. But while Finance officials were up in arms over the ruling, the tax bureau promptly released a circular deferring the implementation of the new VAT law’s implementing rules.

In Revenue Memorandum Circular 30-2005, Tax Commissioner Guillermo L. Parayno, Jr. said the VAT rules under Revenue Regulations 14-2005 would take effect only after the lifting of the TRO. However, taxes already collected and issued with a VAT invoice or receipt must still be declared and remitted by businesses in their monthly VAT returns, he said.

Meanwhile, non-VAT receipts which became VAT invoices under the rules must be reverted back to non-VAT status and restamped "Non-VAT no input allowed." A line must also be drawn across the words "VAT-registered" in such receipts.

The new VAT law, among others, had lifted the exemptions previously enjoyed by doctors, lawyers, cooperatives and the oil and energy sector.

Those who became exempt under RA 9337 and whose receipts were stamped "Non-VAT registered" must draw a red line across the word "Non," Mr. Parayno said.

"In line with the TRO, the Bureau shall revert the VAT status of concerned taxpayers to their registration status prior to July 1, 2005 and make the necessary notification," the circular read. "All taxpayers shall be liable for the taxes and the tax rates they were subject to prior to the effectivity of Republic Act No. 9337 on July 1, 2005."

RA 9337 is the centerpiece of the Arroyo government’s economic reform plan. It was to take effect last Friday. Estimated collections, assuming a 70% efficiency, had been placed at P20 billion this year and P84 billion next year.

President Gloria Macapagal Arroyo is counting on the VAT to fund phase two of her economic reform agenda, specifically, investments on social services and infrastructure.

In another development, Budget Secretary Emilia T. Boncodin said the 2006 national budget will take into consideration the P84 billion in incremental collections from the expanded VAT law for next year.

She declined to say how much the total budget will be as her department’s proposal still has to be presented to the Cabinet on Tuesday. But in a previous interview, she said the total could top P1 trillion.

This year’s budget is P907.6 billion. -- Felipe F. Salvosa with a report from Judy T. Gulane

5-month budget gap well below target

2005-06-21T07:21:00.000+08:00

5-month budget gap well below target
By Des Ferriols
The Philippine Star 06/21/2005

The government reported a budget deficit of P67.8 billion in the first five months of the year, well below the P98.5-billion deficit programmed for the first half of 2005, the Department of Finance (DOF) reported yesterday.

The five-month figure was also 12.4 percent lower than the P77.4-billion shortfall recorded in the same period last year.

Analysts said the latest performance showed the government was on course to meet its deficit target of P180 billion, or 3.4 percent of gross domestic product (GDP), for the full year.

"We can still say that this represents some progress," said David Cohen, director for economic and forecasting at Action Economics in Singapore.

"They look like they’re on track to achieve that target," he added.

For May alone, the country incurred a budget deficit of P7.6 billion, reversing a P3.3 billion surplus in April.

The government in April reported its first monthly budget surplus in four years, following healthy tax collections.

Revenues rose 13 percent to P68.2 billion, up 13 percent from a year earlier, while expenditures climbed 3.9 percent to P75.9 billion.

Despite the improved year-to-date deficit, the peso slumped yesterday to a five- month low of 55.76 to the dollar as investors fretted about scandal threatening the government of President Arroyo.

"We are still much ahead of our full-year target considering that our deficit for the first five months is just (around) 70 percent of what we’ve programmed for the first half," Deputy National Treasurer Eduardo Mendiola told reporters.

The government now expects this year’s budget deficit to hit P151.25 billion, below the official estimate of P180 billion which is 3.4 percent of gross domestic product.

This scenario takes into account revenues to be generated by a new value-added tax, officials said.

RP losing P111 B a year from environment destruction

2005-06-21T07:20:00.000+08:00

RP losing P111 B a year from environment destruction
By Rocel Felix and Ted Torres
The Philippine Star 06/21/2005

The Philippines is losing approximately P111 billion a year due to environmental degradation, according to a World Bank (WB) report.

In its 2004 Philippines Environment Monitor-Assessing Progress report, the WB said the annual economic losses caused by water pollution alone are estimated at P67 billion, while the poor management of resources costs players in the fisheries sector P23 billion in lost income each year.

The increased health costs of air pollution in four urban centers alone are estimated to be more than P21 billion.

The WB said in its report that the Philippines is blessed with a rich diversity of natural resources but population pressure, along with long-term neglect of the environment, has strained ecological systems.

The international agency pointed out that better management of the environment would not only improve the quality of life, but could bring about higher economic growth.

"Good environmental management can attract investments in key growth sectors. The Philippines has great potential to expand tourism. But the tourism industry is very sensitive to effective management of the environment. In the mining industry, effective environmental management improves the investment climate and the support of the population for this very important industry," the report said.

In a forum where the report was introduced yesterday, WB Philippines country director Joachim von Amsberg said "political will, stronger enforcement of laws, modern public institutions, and public participation can all play a part in improving the environment and tapping this potential for the Philippines."

The report noted that forested areas in the country continue to be threatened by the need for more land for agriculture and housing.

"The Philippines has one of the lowest forest cover per capita in the world. As habitats shrink, biodiversity is increasingly endangered. Coastal resources, especially coral reefs, of which over 90 percent are at high risk, mangroves and seagrasses face threats from coastal zone development, expanding agriculture and destructive fishing. Fisheries’ catch per unit of effort has been declining steadily in many areas," said Jitendra Shah, WB’s lead environmental specialist and the report’s principal author.

Shah noted that while the Philippine government has adopted "overarching" laws aimed at improving air and water quality and preserving environmental resources, "the actual change on the ground, measured by environmental indicators, has been slow and not yet sufficient to overcome years of neglect, haphazard policy-making and weak local environmental management."

The report said that successive administrations, the private sector and civic groups have collaborated in enacting important laws such as the Clean Air Act in 1999, Ecological Solid Waste Management Act in 2000, and the Clean Water Act in 2004.

5-month budget deficit stays below target

2005-06-21T07:10:00.000+08:00

5-month budget deficit stays below target
Posted: 1:51 AM Jun. 21, 2005
Inquirer News Service

THE NATIONAL government's budget deficit amounted to P7.6 billion in May, which the Department of Finance said would likely bring the full-year deficit below the target ceiling of P180 billion.

The department reported that the national government last month generated P68.2 billion in revenues and spent P75.8 billion.

The May deficit brought the January-May deficit to P67.8 billion, down 12.4 percent year-on-year.

January-May revenues amounted to P322.3 billion, up 11.6 percent from the same period last year. Expenditures grew 6.5 percent to P390.1 billion.

Deputy Treasurer Eduardo Mendiola said the five-month deficit gave the government enough leeway - P30.72 billion -- to keep the shortfall within the January-June target ceiling of P98.52 billion.

"We can certainly expect to end up with a deficit that is lower than what was programmed for the entire year, especially since our revenue collection continues to be strong," he told reporters.

The Bureau of Internal Revenue collected P221.4 billion in the five-month period, up 14.6 percent year-on-year. The Bureau of Customs also increased its revenue collection, contributing P55.8 billion, up 15.1 percent from January-May last year.

The Department of Finance attributed the increase in revenue collection of the government to administrative measures, such as a strengthened campaign against tax evasion and smuggling, and stricter monitoring of tax and duty remittances.

In April, the national government posted a budget surplus of P3.3 billion, the first monthly surplus in four years.

The finance department said legislative measures such as the recent passage of a new value-added tax (VAT) law would bring down the budget deficit to below the target ceiling this year. Assistant Finance Secretary Gil Beltran said the deficit was likely to reach only P151 billion in 2005.

The VAT law, which is scheduled to be take effect in July, is estimated to generate P28 billion in additional revenue for the remainder of the year and as much as P105 billion annually staring 2006.

The law expands the coverage of the VAT and gives President Gloria Macapagal-Arroyo standby authority to raise the VAT rate from the current 10 percent to 12 percent in January. With INQ7.net

World Bank: RP losing P100B due to environment degradation

2005-06-21T07:09:00.000+08:00

World Bank: RP losing P100B due to environment degradation
First posted 03:58am (Mla time) June 21, 2005
By Christine Gaylican, Blanche S. Rivera
Inquirer News Service

ENVIRONMENTAL degradation is costing the Philippines some P100 billion annually, the World Bank said yesterday.

In its Philippine Environment Report 2004, the World Bank said the country was losing annually P67 billion due to water pollution, P23 billion for lack of management of fisheries resources and P21 billion in health bills because of air pollution.

"These are real economic losses that could be reduced over time through effective environmental management," World Bank-Philippines director Joachim von Amsberg said during the launch of the latest environment report at the Ninoy Aquino Parks and Wildlife in Quezon City.

The report, which assessed the progress made by the Philippines in environmental protection, noted that while there have been policy initiatives at the national and local level, these were not enough to effect substantial changes.

Jitendra Shah, lead environmentalist for World Bank-East Asia and principal author of the report, said he was surprised by the enormity of the Philippines' economic losses due to degradation.

"It will take less than a tenth or even a hundredth of that cost to protect the environment," Shah said.

He said it was important for the Department of Environment and Natural Resources to get a bigger budget to support its programs.

"In some areas, progress in environmental quality has been achieved. But actual change on the ground, measured by environmental indicators, has been slow and not yet sufficient to overcome years of neglect, haphazard policy-making, and weak local environmental management," the World Bank said.

Most of the country's watersheds are considered degraded, while 76 percent of the total forest area face some extent of degradation, the World Bank said.

Around 5.2 million hectares are seriously eroded, reducing soil productivity by up to 50 percent. Another 8,446 hectares or 28 percent of the country's soil are moderately eroded.

While the Philippines' forest cover has increased from 5.4 million hectares in 1988 to 7.168 million hectares in 2002, the Philippines remains among the top 11 tropical countries with the lowest forest cover per capita.

Environment Secretary Michael Defensor said his department was aware of the problem.

"It only goes to show that we really need to change the policy direction. It's really a problem of enforcement," said Defensor, who was present at the launch.

The World Bank also awarded seven environmental champions yesterday, including Puerto Princesa City, the only local government cited for having fully replanted its watershed, apprehending smokers in public places and crafting pro-environment policies that encouraged other local executives to follow suit.

"Poor water quality has large economic and quality-of-life costs in terms of health impacts, potable water costs, foregone tourism revenues and lost fisheries production," Shah pointed out.

He said lack of political will among implementing agencies had led to further pollution of water resources nationwide.

Country loses some P111 billion on environmental degradation

2005-06-21T07:05:00.000+08:00

Country loses some P111 billion on environmental degradation
BY JEFFREY O. VALISNO, Reporter
Business World Online

The country has wasted about P111 billion annually from lost economic opportunities brought about by the continuing degradation of the environment, the World Bank (WB) said yesterday.

Based on findings contained in the report, entitled "Philippine Environment Monitor 2004," the Bank said the government should take concrete steps to protect the environment.

It noted that annual economic losses from water pollution are estimated at P67 billion ($1.3 billion), while the mismanagement of fisheries resources cost P23 billion ($420 million). The increased health costs of exposure to air pollution (particulate matter) in four urban centers alone are estimated to be over P21 billion ($400 million).

WB Philippines Country Director Joachim von Amsberg said the government should have a stronger long-term commitment to environmental protection.

"Political will, stronger enforcement of laws, modern public institutions, and public participation can all play a part in improving the environment and tapping this potential for the Philippines," he said in a statement.

He added that good environmental management could attract investments in key growth sectors like tourism and mining.

"The Philippines has great potential to expand tourism. But the tourism industry is very sensitive to effective management of the environment. In the mining industry, effective environmental management improves the investment climate and the support of the population for this very important industry. Finally, the international services industry can be attracted by a good urban environment," he said.

The Bank said the economy remains acutely dependent on natural resources. The rural sector, for one, employs some 11.2 million, and in 2003 generated P632 billion through agriculture, fisheries, and forestry-based industries.

The Bank added noted that any environmental degradation would have a severe impact the poor, since two-thirds of those who still earn less than $2 per day are engaged in activities that rely on environmen-tal and natural resources.

Approximately 20 million reside in and around forests, and 60 million live within 100 kms of the coastline.

"Evidence, mostly anecdotal, suggests that poor people and those whose income and welfare are more tightly linked to environmental and natural resources are disproportionately affected by the continuing declines in environment quality," the Bank said.

Meanwhile, the continued deforestation, and natural resource degradation could threaten livelihoods, and intensify poverty in the country, the Asian Development Bank (ADB) said.

Speaking at the recent Philippine Forestry Development Forum, Shamshad Akhtar, director general of the Southeast Asia department, was quoted in a statement, "Forest loss and poverty are mutually reinforcing and unless addressed in an integrated manner, will threaten both the livelihoods of the poor and the environmental security of the country."

Ms. Akhtar urged the govern-ment to immediately take action since the Philippines has one of the lowest forest cover per capita in the world. The country’s forest cover has continuously declined to less than 18% last year from 64% in 1920.

"Despite forestry projects implemented by various organiza-tions and policies implemented by the government to slow forestry loss, the rate of decline in natural forests and associated biological diversity has continued," the Bank official said.

The ADB has assisted the forestry sector through five major development projects and programs supported by five loans amounting to a total of $311 million, and technical assistance grants with a total amount of more than $9 million.

The ADB has supported the upland development and protection of watersheds, critical ecosystems, and promoted private sector and community-based forest production management.

These projects also supported policy and institutional reform measures to facilitate a participatory process in sustainable forest development, enhance coordination of sector investment activities and strengthen institutional capacity of the Department of Environment and Natural Resources.

The bank has also given support to capacity building watershed management, biodiversity conservation and wood industry development.

Budget back in deficit

2005-06-21T07:03:00.000+08:00

Budget back in deficit
Reverses rare surplus in April, but still on target
Business World Online

The government budget returned to a deficit in May after a rare surplus in April, officials said yesterday, but analysts said there were signs of improvement on the back of a campaign to stamp out tax evasion.

The government reported a budget deficit of P7.6 billion in May, down from P12.7 billion recorded in the same month last year. In the first five months of 2005, the budget deficit was P67.8 billion, 12.4% lower than the P77.4-billion deficit in the same period of 2004, and only 70% of the government’s target for the first six months.

Analysts said that showed the government was on course to meet its deficit target of P180 billion, or 3.4% of gross domestic product, for the full year. Revenues rose by 13% in May from a year earlier to P68.2 billion, while expenditures climbed by 3.9% to P75.9 billion.

Despite the improved year-to-date deficit, the peso slumped to a five-month low of P55.76 to the dollar as investors fretted about a political scandal threatening the government of President Gloria Macapagal Arroyo.

The government said last week its tax collections rose by 18% in the year through May, following record high tax collections in April that helped it record its first monthly surplus in four years. A campaign against high-profile tax evasion suspects has been credited for the improving tax take.

Government officials had said earlier this month they expected the budget deficit to come in at just P150 billion this year, and to drop to P89 billion next year, due to an expansion of the national sales tax.

"We are still much ahead of our full-year target considering that our deficit for the first five months is just [around] 70% of what we’ve programmed for the first half," Deputy National Treasurer Eduardo Mendiola told reporters.

He attributed the lower deficit to steps the government took in rationalizing expenditures and improving collection and tax administration.

A report from Finance and Treasury showed that for January-May, revenues grew by 11.6% year on year to P322.347 billion from P288.795 billion. The Bureau of Internal Revenue reported a 14.6% increase in collections to P221.4 billion, while Customs collections went up by 11.3% to P55.8 billion. Expenditures grew by 6.5% to P390.104 billion from P366.148 billion.

Officials also said the budget deficit was financed by foreign borrowings equivalent to P103.1 billion. The government sold $1.5 billion and $750 million in global bonds in February and May, respectively. Net domestic borrowings during the five-month period reached P52.1 billion. Overall, borrowings increased by 52.2% year on year to P155.224 billion from P102.019 billion.

The government expects to limit its borrowing in the future as revenues increase with the help of new tax laws. It also expects to balance its budget by 2010, although some officials said this could be achieved as early as 2008.

In May alone, revenues totaled P68.249 billion, up by 13.1% from last year’s P60.332 billion. The tax bureau accounted for P48.8 billion, followed by Customs with P12.2 billion, the Bureau of the Treasury with P4.4 billion, and other government offices with P2.8 billion. Expenditures were up slightly at P75.879 billion, or 3.9% higher than P72.014 billion in May 2004. Borrowings for the month totaled P51.958 billion, more than double of last year’s P23.029 billion. -- Reuters with AFP, F. F. Salvosa, and K. L. Yap

No Free Lunch: Bright spots in agriculture

2005-06-20T11:19:00.000+08:00

No Free Lunch: Bright spots in agriculture
Posted: 8:07 PM Jun. 19, 2005
Cielito Habito
Inquirer News Service

Published on Page B2 of the June 20, 2005 issue of the Philippine Daily Inquirer

I HAVE become a great believer in local governments, even saying that they are the hope of this country amid the often glaring shortcomings of the national government.

This conviction has been further reinforced in recent years, especially with the experience of judging local government awards like the League of Cities Best Practices Award and the Gawad Galing Pook.

These gave me the chance to witness a wide array of truly wonderful initiatives undertaken by local governments, a great source of inspiration and hope especially at a time when so many of our people seem to have given up on our country and would rather bail out and ship out if they can. And one critical area wherein local governments have demonstrated that they can get things done and do them well if given the chance is in pushing the development of the farm sector.

Convergence thru BADC
A case in point is the Barangay Agricultural Development Center (BADC), a project that won Gov. George P. Arnaiz and the province of Negros Oriental the Gawad Galing Pook last year. Conceived in 1997, the program was a response to a long-felt need: upland dwellers dependent on the land had been wallowing in persistent poverty, with many being pushed into insurgency. Noting the wide array of largely uncoordinated services directed at the rural sector coming from different government agencies, the provincial government moved to orchestrate a convergence of resources and services, with the BADC as the venue. Through the BADC, community residents are also empowered to directly participate in analyzing the condition of their community, identifying problems besetting them, and planning and implementing solutions and projects to address them. The BADC likewise serves as a training center for agriculture and fishery development. Apart from teaching sound and sustainable farming practices like organic farming, integrated pest management, contour farming, and natural farming systems, the training they provide also focuses on values education, leadership, management skills and community participatory processes.

Quantitative and qualitative measures indicate that the program has done much good. Rice and corn production grew seven-fold and six-fold respectively within six years; substantial increases were similarly achieved in the production and yield of vegetables, legumes and root crops. The National Statistics Office (NSO) reported an increase in average annual income of farm households from P71,524 in 1997 to P90,459 in 2000, a 25-percent increase. Meanwhile, the Integrated Provincial Health Office reported substantial reduction (up to half) in malnutrition rates in participating areas.

Localizing AFMA
From a national perspective, the much-heralded Agricultural Fisheries Modernization Act (AFMA) passed by Congress in the mid-1990s is seen by most as having made little impact. But Mayor Randolph Ting of Tuguegarao City has shown how much can be achieved with a more focused local approach through the city government's program dubbed "Local AFMA," which was among the top five winners of the League of Cities Best Practices Award in 2003. In that year, the city devoted P11.6 million to the provision of a package of support to farms and fisheries that included construction of irrigation facilities and farm-to-market roads, establishment of a farm machinery rental pool, training and extension, rejuvenation of municipal fisheries, development of cooperatives, and fostering institutional linkages among farmers, NGOs, cooperatives, corporations, private investors, schools, LGUs and regional line agencies. Having sustained the program over the years from its inception in 1999, the resulting benefits are quite apparent.

Like Negros Oriental, Tuguegarao reports dramatic payoffs to their efforts in terms of significant increases in agricultural production and yields, and farm household incomes. Average per hectare rice yields rose from 4.5 metric tons (MT) before the program, to 5.5 MT now. The improvement in corn was even more spectacular, from 1.9 MT to 6.2 MT. Yield of high-value commercial crops doubled from 8 to 15 MT, while fish sufficiency rose dramatically from only 3 percent to 62 percent. Annual household income of almost 4,000 households reportedly shot up from P12,000 to P85,000.

Negros Oriental and Tuguegarao City are not isolated cases. Similar success stories abound in other LGUs around the country, including in Trinidad, Bohol; Bacarra, Ilocos Norte; Zamboangita, Negros Oriental; Magsaysay, Davao del Sur; Irosin, Sorsogon; and province-wide programs of Negros Occidental and Davao, to name only a few.

Partnerships
A common thread in these LGU success stories is active partnerships at the local level among various government entities, the private sector and civil society groups. Through close cooperation and coordination among the various stakeholders in agriculture development, greater efficiency and effectiveness is achieved, and budgetary resources go a much longer way.

All these suggest that making more dramatic headway in improving Philippine agriculture hinges not so much on the Department of Agriculture (DA) providing services and materials directly to our country's farms and farmers, but on how it can get local governments around the country to assume this role more actively. DA's more proper role is to set technical standards, provide technical guidance to LGUs, and monitor overall results--not to take matters into its own hands. The single most important reform the DA can do for Philippine agriculture is to step backward, while helping LGUs to step forward. DA must be the captain that will do the steering, but must rely on LGUs to do the rowing. This way, many believe Philippine agriculture will finally get somewhere.

RP economy: Most dynamic turnaround story in progress

2005-06-20T11:17:00.000+08:00

RP economy: Most dynamic turnaround story in progress
Posted: 7:34 PM Jun. 19, 2005
Elizabeth L. Sanchez
Inquirer News Service

Published on Page B2 of the June 20, 2005 issue of the Philippine Daily Inquirer

FOREIGN analysts are still keeping the Philippines on their radar screens despite political scandals erupting against President Macapagal-Arroyo, Philippine Stock Exchange president Francis Lim said.

In a statement, Lim said separate assessments made by Fitch and UBS Securities Asia on the Philippines showed that investors have a positive outlook on the country's macroeconomic fundamentals despite controversies rocking the government.

In a research note recently released, Fitch reported the country's overall deficit and debt positions were expected to improve in the near term following the passage of key revenue measures.

The credit-rating agency sees the budget deficit dropping to 2.7 percent of total economic output next year in line with government targets.

In a separate investment research report, UBS Securities Asia named the Philippines as the most dynamic turnaround story in progress in the Asian region, along with Indonesia.

According to UBS, the enactment of the new value-added tax (VAT) bill has laid the groundwork for a turnaround in the country's fiscal dynamics.

UBS reported that over the next two years, public sector debt could actually fall by 9 percent of GDP, before stabilizing in the second half of the decade.

It cited reasons for the improvement such as higher tax revenues due to the new tax bills, lower losses by the state-owned National Power Corp. due to higher cost pass-through, and lower real interest rates and a stronger real exchange rate.

UBS also reported that the Philippines was undergoing a "virtuous circle." UBS said the peso has been outperforming most other Asian currencies and the Philippines was one of the only economies in Asia where short-term interest rates have fallen rather than risen.

Lim, for his part, said "the positive outlook on the country's macroeconomic fundamentals demonstrates that the Philippines as an investment site is sound and healthy."

Net earnings of listed companies on the PSE soared 51 percent to P36.75 billion in the first quarter of the year from P24.32 billion a year ago.

Proposed income tax cut seen to wipe out add’l VAT collection

2005-06-20T11:10:00.000+08:00

Proposed income tax cut seen to wipe out add’l VAT collection
By Des Ferriols
The Philippine Star 06/20/2005

The government will lose nearly half of its incremental collections from the increase in the value-added tax (VAT) rate if Congress approves the proposed reduction in the income tax rate.

The National Tax Research Center (NTRC) disclosed over the weekend that the proposed legislations now pending in both houses of Congress would shave off between P14 billion and P50 billion from the government’s tax revenues.

NTRC director Lina Isorena told reporters that initial simulations indicated loss of tax revenues that would ultimately eat into the incremental tax revenues from the two percentage-point increase in the value added tax (VAT) rate beginning next year.

According to Isorena, the proposed changes in the individual income tax structure would essentially offset the VAT impact by at least one third.

There are at least four proposed tax measures pending in the Senate seeking to amend the individual income tax structure, purportedly to offset the impact of the VAT adjustment on family income.

According to Isorena, the legislative measure filed by Senator Loi Estrada would result to revenue losses of at least P48 billion a year while the bill proposed by Senator Ralph Recto would take off at least P14 billion from the annual revenue collection.

The Department of Finance (DOF) had expected to collect an additional P28 billion to P31 billion from the lifting of various VAT exemptions this year and over P100 billion from the increase in the actual VAT rate beginning 2006

If the individual income tax structure is adjusted, Isorena said the incremental revenue collections from the VAT would ultimately dissipate.

The Arroyo administration had planned to use the proceeds of the new value added tax law to reduce its budget deficit this year and then 70 percent of future proceeds beginning 2006.

For the first time since the Arroyo administration went into austerity mode, the DOF also planned to increase its budget allocations for social services and infrastructure.

Income tax cuts to erase gains from VAT and other new taxes

2005-06-20T11:05:00.000+08:00

Income tax cuts to erase gains from VAT and other new taxes
Business World Online

Proposals in the Senate to cut individual income tax rates by up to half will cost the government as much as P50 billion in foregone revenues and will erase projected revenue gains from the new value-added (VAT) tax, a study by the National Tax Research Center shows.

The pending bills also do not provide other revenue sources to compensate for potential losses, said Lina D. Isorena, tax research center executive director.

Senator Luisa P. Ejercito-Estrada’s plan to increase personal exemptions will result in at least P48 billion in foregone revenues, she said.

Similarly, the proposal of Senator Juan Ponce Enrile to reduce the rates by half and add additional tax brackets for wealthier individuals will result in substantial losses, although Ms. Isorena did not give the exact figure.

Senator Ralph G. Recto’s version is the least costly at P14 billion, the tax research center chief said. Mr. Recto, chairman of the Senate ways and means committee, wants to reduce the tax rates for lower income earners by 30% to increase their take-home pay.

For those earning below P10,000 annually, the income tax rate will be 3.5% (from 5%); over P10,000 to P30,000, P350 plus 7% of the excess over P10,000 (from P500 plus 10%); over P30,000 to P70,000, P1,750 plus 10.5% of the excess over P30,000 (from P2,500 plus 15%); over P70,000 to P140,000, P5,950 plus 14% of the excess over P70,000 (from P8,500 plus 20%); over P140,000 to P250,000, P15,750 plus 17.5% of the excess over P140,000 (from P22,500 plus 25%); over P250,000 to P500,000, P35,000 plus 30% of the excess over P250,000 (from P50,000); and over P500,000, P110,000 plus 32% of the excess over P500,000 (from P125,000 plus 34%).

In his explanatory note, Mr. Recto pointed out that proposals for additional taxes, mostly in the form of consumption taxes, "would greatly affect the personal disposable income of majority of Filipinos."

He noted that 13.25 million wage earners covering 86% of all Filipino families have a gross annual income of below P250,000.

An individual with a net income of P250,000 must pay 25% or P50,000.

"Hence, an average family of six can spend only P200,000 annually for its total family expenditures on food, clothing, education, health, housing and transportation," Mr. Recto said.

He admitted that the tax relief plan would result in foregone revenues, "but it will still be a win-win situation for the government in the long run."

"More money in the taxpayer’s pocket will boost consumer spending, which in turn trigger demand for more goods and services and thereby stimulate activities in the industrial and service sectors," he added.

Data show most taxpayers belong to lower income brackets, with 30% earning P100,000 and below annually, Ms. Isorena said Only 3% to 5% of taxpayers earn P500,000 and above. -- F. F. Salvosa

GMA announces increase in revenues

2005-06-17T13:51:00.000+08:00

GMA announces increase in revenues
By Paolo Romero
The Philippine Star 06/17/2005

The government is now in a good position to address the ballooning budget deficit with the 18-percent increase in revenue collections during the first five months of the year, President Arroyo announced yesterday.

Citing the report by Finance Secretary Cesar Purisima, Mrs. Arroyo said the total revenues collected by the national government in May 2004 had reached P60.3 billion.

This means last month’s collection of P71.154 billion reflected an 18 percent increase in revenues, she said.

"I am also very happy to hear from Secretary Purisima, the head of our economic team, that our budget deficit today is way below the ceiling we had allowed for ourselves," Mrs. Arroyo said during the launching of the Second Philippines Progress Report on the Millennium Development Goals (MDG) at the Manila Hotel.

The Department of Finance (DOF) sets deficit ceilings on a quarterly basis, given that there are months in which collections are expected to be high, including April when all private companies and individual taxpayers are required to pay their taxes covering income generated as of the end of the previous year.

The deficit ceiling for the first half of the year was at P98.5 billion.

Official data from the DOF showed the cumulative deficit from January to April 2005 was at P60.1 billion, only 61 percent of the ceiling for the first six months.

The data also reflected that the national government was able to post a budget surplus of P3.3 billion for the month of April 2005.

This came as a result of the implementation of the first batch of fiscal reforms of the Arroyo administration, a Malacañang statement said.

The Palace also said the administration’s economic programs and indicators garnered favorable marks from international agencies including the United Nations.

Outgoing UN resident coordinator Deborah Landley said the Philippines might be able to meet its MDG targets.

"I’m very happy about the progress made by the Philippines under (Mrs. Arroyo’s) leadership," the statement said, quoting Landley.

Gov’t lost P430 billion in tax leaks

2005-06-17T13:50:00.000+08:00

Gov’t lost P430 billion in tax leaks
By Des Ferriols
The Philippine Star 06/17/2005

The government has lost nearly P430 billion in a span of five years from fiscal leaks in corporate and individual income tax administration.

This translates to an average of P85.7 billion a year from 1998 to 2002, the National Tax Research Center (NTRC) said yesterday.

According to the NTRC, individual fixed-income earners have been faithfully paying their taxes, but the same could not be said for corporations or professional and self-employed individuals.

NTRC director Lina Isorena told reporters yesterday that historically, individual fixed-income earners have been paying more taxes than other segments of the taxable population, with an estimated tax leakage of only 8.6 percent every year from 1998 to 2002.

The gap between collectible taxes and actual taxes paid by professional and self-employed individuals, on the other hand, averaged 69 percent during the same period.

According to Isorena, the gap between the taxable income and the actual tax collection from individual fixed-income earners averaged only P4.6 billion a year in 1998-2002 while the gap was P26.7 billion every year for professional and self-employed individuals.

For corporate taxes, Isorena said the NTRC estimated a tax gap of about 62 percent, indicating that the government missed out on an average of P54.4 billion every year from corporations that managed to skirt paying the correct corporate income taxes.

Isorena said the NTRC estimated that the Bureau of Internal Revenue (BIR) collected only an average of about 30 percent of the amount that should have been paid by professionals and self-employed individuals.

Gasoline prices seen to be hardest hit by new VAT law

2005-06-17T13:45:00.000+08:00

Gasoline prices seen to be hardest hit by new VAT law
Posted: 2:58 AM Jun. 17, 2005
Abigail L. Ho
Inquirer News Service

FUEL pump prices will definitely rise upon the imposition on July 1 of the 10-percent value-added tax (VAT). But gasoline prices will be the hardest hit, as excise taxes will still be slapped on gasoline, unlike the socially sensitive diesel.

Under the expanded VAT law, the P1.63-a-liter excise tax on diesel will be scrapped when the law takes effect. Gasoline, however, will still be slapped an excise tax of P4.35 a liter, 45 centavos lower than the current level.

In a briefing yesterday, Consumer and Oil Price Watch chairman Raul Concepcion said oil companies had a cost over-recovery of P1.00 per liter of gasoline, which is offset by cost under-recoveries of the same amount on diesel.

This means that upon the imposition of the VAT next month oil companies will no longer have any cost under-recoveries, which will make pump price adjustments reliant on factors such as the new tax and further movements of oil prices in the world market, Concepcion said.

With the imposition of the 10-percent VAT, he said gasoline prices would likely go up due to the presence of the excise tax.

The removal of the excise tax on diesel would ease the impact of the VAT on pump prices, he said.

Energy Undersecretary Peter Anthony Abaya earlier said the Department of Energy was looking at other measures the government could do to ease the impact of the VAT on pump prices.

"Getting prices lower is one of the targets of the Department of Energy," he said. "We're looking at other taxes that can be reduced."

Energy Secretary Raphael Lotilla revealed that the government was considering bringing down the tariff level on crude and refined petroleum product imports to three percent from five percent -- back to the level before Malacañang issued an order raising it to five percent.

"We're looking at mitigating measures within the [VAT] law, but we're also looking at a reduction in tariff duties," Lotilla said.

Since the beginning of the year, oil firms have jacked up gasoline prices nine times, by a total of P4.85 a liter, and diesel fuel 10 times, by a total of P5.05 a liter. With INQ7.net

Int'l bank sees credit-rating upgrade for Philippines

2005-06-17T13:39:00.000+08:00

Int'l bank sees credit-rating upgrade for Philippines
Posted: 2:54 AM Jun. 17, 2005
Inquirer News Service

THE PHILIPPINES will likely merit a sovereign credit rating upgrade this year on sustained progress from fiscal consolidation, a visiting top economist of Standard Chartered Bank said.

The country is starting to reap the benefits of fiscal consolidation, with a stronger peso and narrower bond spreads that made debt servicing much easier, Mike Moran told reporters, but added that the ensuing increases in taxes and utility prices could initially impinge on economic growth.

The Hong Kong-based economist said the outlook of credit rating agencies on the Philippines was starting to improve and a continued reform could lead to an upgrade by the end of the year.

"I have to admit that when the government's projection that it could balance its budget by 2008 first came out last year, I thought it was very optimistic," Moran said. "But given what we've seen in the last six months, it has become a realistic target."

He said that he was overall "cautiously optimistic" on the Philippines, despite political jitters arising from accusations that President Gloria Macapagal-Arroyo had rigged the last presidential elections and that her husband, son and brother-in-law were benefiting from "jueteng,' an illegal numbers game.

"From the fundamental side, there's a lot of good news coming out of the Philippines but the political risk premium may undermine a lot of the confidence that has been built up," Moran said.

"Clearly, investors are looking at the political turbulence that has emerged recently as a reason for them to wait and see how the environment develops before committing new investments," he said.

Standard Chartered Bank expects the Philippines to register a gross domestic product (GDP) growth of 4.7 percent this year, 4.2 percent in 2006 and 4.5 percent in 2007.

Its forecasts for the Philippines are the lowest among the four biggest economies of in the ASEAN region, compared with 5.5 percent for Indonesia, 5.0 percent for Malaysia and 5.9 percent for Thailand in 2006, and 5.7 percent, 6.0 percent and 6.5 percent, respectively, in 2007.

"Over the next two to three years, with this fiscal consolidation program, we will necessarily see continued pressure on the consumption side of the economy, whether it's an increase in the VAT (value-added tax) or whether it's the electricity tariff that's being increased this year and with possibly more increases going forward," Moran said. With INQ7.net

2nd-quarter growth seen at over 5%

2005-06-17T13:38:00.000+08:00

2nd-quarter growth seen at over 5%
Posted: 4:49 AM Jun. 17, 2005
Inquirer News Service

ECONOMIC growth in the second quarter of the year will likely exceed 5.0 percent, compared with the first quarter's 4.6 percent, as farm production improves, Economic Planning Secretary Romulo Neri.

Neri said the agriculture sector, which accounts for one-fifth of the economy, was expected to post growth in the gross domestic product (GDP) in the second quarter after a contraction in the first first.

"We now see improvements in the agriculture sector, as rice and corn production was better (than the previous quarter)," Neri told reporters after presenting a progress report on the Philippines' Millennium Development Goals.

The second-quarter projection boosted optimism that the economy can still hit the 5.3-6.3 percent growth target for the year, although, Neri said, the full-year growth might reach only the lower end of the target range.

In the first quarter, GDP growth slowed to 4.6 percent from 6.4 percent in the same period last year, because of weather disruptions that reduced farm output, a continued rise in oil prices and a slowdown in global growth.

High oil prices resulted in reduced consumer and business spending, dampening demand both in the Philippines and in its export markets.

The agriculture, fisheries and forestry sector posted a 0.1-percent contraction because of bad weather conditions in the first quarter, after recording an 8.6-percent growth in the same period in 2004.

The government, trying to ease its budget deficit and debt problems,+ recorded a 0.9-percent drop in spending, after posting a 4.1-percent growth in the first quarter of 2004.

The adverse economic impact of the government's tight spending policy is temporary, Neri said, pointing to reforms to raise additional revenues, such as increased taxes and stricter tax collection, aimed at moving the economy forward.

"It's pain in the short run, but gain in the long run," he said.

Neri earlier said GDP growth in the July-December half of the year would likely reach at least 5.5 percent and compensate for the low first-quarter growth.

In the meantime, he said, the prevailing political concerns are not expected to significantly affect the economy's performance.

He said political wrangling had always been part of Philippine history and the economy somehow developed resilience from the adverse effects of politics. Michelle V. Remo, with INQ7.net

Good life for most Filipinos in next 10 years -- NEDA

2005-06-17T13:36:00.000+08:00

Good life for most Filipinos in next 10 years -- NEDA
First posted 02:03am (Mla time) June 17, 2005
By Michelle Remo
Inquirer News Service

THE NATIONAL Economic and Development Authority (NEDA) said yesterday the goal of providing a good life for most Filipinos in the next 10 years could be reached, but a lot more effort should be exerted to create the desired economic and social environment to sustain it.

In the presentation of the Second Philippine Progress Report on the Millennium Development Goals (MDGs), NEDA Director General Romulo Neri said the Philippines was likely to attain targets on reducing extreme poverty, providing primary education to all school-aged children, and reducing child mortality.

But the country's chief economist said "challenges" remained in improving maternal health and reproductive health services, reducing the incidence of illnesses, achieving sustainability of natural resources, and enhancing the country's global competitiveness.

"We are on track to meet our goals, especially on poverty reduction, but we need to do more in some areas," Neri said in his presentation at the Manila Hotel.

There are eight items in the MDGs: eradication of extreme poverty and hunger, achievement of universal primary education; promotion of gender equality; reduction of child mortality; improvement of maternal health; combating of HIV/AIDS, malaria and other diseases; environment sustainability, and development of a global partnership for development.

Poverty reduction

On poverty reduction, the report stated that the number of Filipinos that do not meet the minimum required food intake a day declined from 15.8 percent of the total population in 2000 to 13.8 percent in 2003. The subsistence food threshold was set at P8,134 per capita per year, or P3,389 per month for a family of five members.

The prevalence of underweight schoolchildren declined from 30.6 percent of the total schoolchildren population in 2001 to 27.6 percent in 2003.

The report also stated that the proportion of Filipino households whose per capita dietary intake fell below the minimum energy requirement decreased from 69.4 in 1993 to 56.9 percent in 2003.

But Neri said that while there had been progress in reducing the number of Filipinos that do not meet their energy requirement, the decline by 1.25 percentage points was off the specific target of an annual reduction of 1.85 percent a year.

On primary education for school-aged children, Neri said participation rate was already at 90.5 percent in school year 2002 to 2003.

Neri said that on discussing gender equality, females had the advantage over males in terms of education and literacy. He said the literacy rate among females was at 94.6 percent in 2003 compared with the 93.2 percent for males.

Child mortality

On the need to reduce the level of child mortality, Neri said the Philippines gained some notable progress, as the child mortality rate decreased over the past 10 years from 34 to 29 infant deaths per 1,000 live births. He also said deaths of children under 5 years old per 1,000 live births decreased from 54 to 40.

Neri said that from 1993 to 1998, the National Demographic and Health Survey showed a declining trend of maternal mortality rate from 209 per 100,000 live births in 1987-93 to 172 deaths in 1991-97.

The report said the number of HIV cases increased from 1,451 in 2,000 to 2,200 in December 2004. It estimated that the actual number of HIV cases was 10,000, but the prevalence rate of HIV was still at a relatively low level at below one percent.

Neri noted there was an urgent need to properly manage the country's natural resources, as widespread poverty partly hinged on problems related to the handling of these resources.

Environment

"The situation elsewhere is not encouraging. Where the country's marine resources are concerned, overfishing, destructive fishing methods, siltation and pollution have threatened the productivity of the coastal and marine ecosystems," he said.

He said 2003 data stated that the country's air quality in urban areas did not pass international standards.

On water, Neri noted that of 462 bodies of water in the country, only 35 percent met the "Class C" mark of the Department of Environment and Natural Resources. Water quality below Class C means that the water cannot support life systems.

He also noted the statistics on solid waste management, which showed that 65-75 percent of total waste generated in Metro Manila was collected and only 13 percent recycled. Garbage in the metropolis reached 5,345 tons a day, he added.

In the area of developing global partnership, Neri noted that the Philippine economy grew moderately from 2001 to 2004, with gross domestic product expanding at an average rate of four percent. But he also said that the ranking of the Philippines in the Global Competitiveness Report slipped from 2001 to 2004.

Arroyo: 'They are going too far'

2005-06-17T13:34:00.000+08:00

Arroyo: 'They are going too far'
First posted 00:10am (Mla time) June 17, 2005
By Christine O. Avendaño, Nikko Dizon
Inquirer News Service

BUOYED by a positive report on the economic front, President Gloria Macapagal-Arroyo yesterday went on the offensive against her political opponents, accusing them of making a last-ditch effort to derail her development goals now that she is on the verge of achieving them and vowing she would not be deterred.

"For four long years, I have taken personal abuse in the hope that reconciliation will be about national harmony," the President said.

"But now they are trying and they are going too far, because this is their 'now or never,'" she said. "No one shall block the path of the presidency, not even my irresponsible detractors who wish to set back our gains and reverse our engine of growth and development."

Ms Arroyo, in the center of a firestorm sparked by allegations of cheating in the last election and charges that her family was involved in illegal gambling payoffs, said she had "faith in God" that "the Filipino will hold on [to] their undying faith and the future of this country and in our democratic way of life."

Ms Arroyo spoke at the Manila Hotel during the launch of the Philippine Report on the Millennium Development Goals (MDGs) -- a set of measurable targets and time lines reached during the UN summit in 2000 to reduce poverty and the worst forms of human degradation.

The Philippines is inching toward the achievement of several MDG targets, such as reducing extreme poverty, child mortality and the incidence of tuberculosis, malaria and HIV/AIDS; improving dietary requirements among Filipino children; gender equality in education, and access to safe drinking water, according to the progress report prepared by the National Economic and Development Authority.

Deborah Landey, outgoing resident UN coordinator, expressed confidence that the current political turmoil would not set back the Philippines' progress toward achieving targets in the MDGs of the UN Development Program (UNDP).

"The work on the MDGs have been going on for years in this country. Many, many people in society have been working very hard on these goals and that work will continue. No doubt about that. You should be very proud of the results," said Landey, who leaves today for a new post in Geneva, Switzerland.

Ms Arroyo said that with the implementation of the second phase of her economic reforms, the "destabilizers" realized they had to move against her now before the "gains" of these reforms could be achieved.

"It is now or never for them because when Phase 2 begins to bear fruit and the Millennium Development Goals will become attainable, it will be too late for them," she said.

Obviously referring to the raging controversies hounding her and her family, Ms Arroyo said her detractors were taking advantage of her unpopularity that arose in the first place when she made the tough decisions, like pushing for new taxes to fund her economic reforms.

Improved tax collection

Outlining improvements in the economy, Ms Arroyo said the government was able to surpass tax collection targets in May, a repeat of the effort achieved the month before.

"I am happy to hear once again that our May collections are higher by 18 percent than the May collections of last year," she said.

Likewise, the President disclosed that Finance Secretary Cesar Purisima had reported to her that the budget deficit was now "below the ceiling we have allowed for ourselves."

Ms Arroyo said the country was "on track" with its MDG objective to beat hunger and poverty by 2015. She also said the unemployment rate had gone down from 3.1 million to 2.9 million jobless Filipinos over the past year.

"At least, we are no longer running in place like (a jogger on) a treadmill," she said.

Gov’t says RP on track to achieving Millennium Development Goals

2005-06-17T13:30:00.000+08:00

Gov’t says RP on track to achieving Millennium Development Goals
BY JEFFREY O. VALISNO, Reporter
Business World Online

The Philippines remains on track to achieving the United Nations-sponsored Millennium Development Goals (MDGs), the National Economic and Development Authority (NEDA) yesterday claimed.

However, not all targets are expected to be attained by 2015 as scheduled, with poverty alleviation seemingly the only certainty of eight commitments.

At the launch of the 2nd Philippine Progress Report on its achievements on the UN goals yesterday, Socioeconomic Planning Sec. Romulo L. Neri expressed confidence that the number of hungry Filipinos will be halved in the next 10 years.

Under the MDGs, the government has committed to reduce extreme hunger to 34.7% by 2015 from the current 56.9%.

He also said there is a high probability that the Philippines will achieve MDG targets on reducing child mortality and the incidence of tuberculosis, malaria, and HIV/AIDS, as well as improving gender equality and providing basic amenities like safe drinking water.

"There is likelihood of achieving the MDGs at the national level, but it has been uncovered that wide disparities exist across regions," Mr. Neri said.

The NEDA official admitted that the government has to double its efforts to meet its MDG targets in achieving universal primary education, improving maternal health, as well as access to reproductive health services.

In the case of primary education, the Autonomous Region in Muslim Mindanao showed that 42.91% of those who enter Grade I do not continue and finish elementary education.

Under the MDGs, the government aims to give all school-age children access to primary education.

The government, meanwhile, admitted it does not have sufficient data to measure if it has been successful in reducing maternal deaths.

"It is difficult to conclude that maternal mortality rates has really declined, due to problems of large sampling errors, and the absence of new official data," Mr. Neri said.

He also said the government may not attain its target to increase the practice of responsible parenthood to 70% from 40%. Current figures show that as of 2002-2003, only 48.9% of couples were planning their families.

However, Mr. Neri said the government is not lacking in funding given the implementation of fiscal reforms.

"Budget is not much of a problem anymore because we have enough money as a result of the better fiscal picture," he told reporters.

The government has said as much as P100 million in additional revenues would be raised this year alone after Congress approved higher "sin" taxes, a reward/punishment system at revenue collecting agencies, and adjustments to the value-added tax regime.

Mr. Neri said line agencies have also allotted portions of their budget starting this year to achieve the MDG goals.

The Philippines committed to achieving the MDGs when it signed the Millennium Declaration in 2000.

The MDGs involve halving extreme poverty and hunger by 2015; achieving universal primary education; promoting gender equality; reducing child mortality; improving maternal health; combating HIV/AIDS, malaria and other diseases; ensuring environmental sustainability, and promoting a global partnership for development.

Under the 2005-2010 Medium-Term Public Investment Program, the government is expected to shell out P718.2 billion to achieve the MDGs.

Government-owned and controlled corporations and government financial institutions would be asked to provide P484.7 billion.

The private sector and local government units, meanwhile, will be asked to shoulder P473.9 billion of the MDGs’ financial requirements, while P67.2 billion would come from grant financing by multilateral institutions.

Finance dept gives in to call for VAT amendment

2005-06-15T10:34:00.000+08:00

Finance dept gives in to call for VAT amendment
Posted: 2:30 AM Jun. 15, 2005
Michelle V. Remo
Inquirer News Service

GIVING in to calls from the business sector, the Department of Finance has agreed to a proposal to ask for an amendment to the recently approved value-added tax (VAT) law and alter the 70-percent maximum limit on input VAT credits.

The law allows businesses to claim only up to 70 percent of the input VAT credits they gain in a year, as a safeguard against instances in which input VAT claims of corporate taxpayers exceed their output VAT liabilities and consequently make the government liable to grant refunds.

Finance Secretary Cesar Purisima said implementation of the VAT law would push through as scheduled in July but added the 70-percent cap should be reviewed, considering that quite a number of businesses had begun questioning its practicality.

Some business groups claim that the 70-percent VAT cap would prohibit them from fully recovering the VAT they pay for inputs, such as raw materials.

Purisima said that to deal with the issue on the input credit limit, the finance department and the Bureau of Internal Revenue (BIR) would consider two temporary solutions. One is to allow taxpayers to deduct input VAT credits from the income tax they will pay on or before the April 15 deadline next year. The other is to allow them to apply for refunds.

To avoid going against the provision of the VAT law, the Department of Finance and the BIR are looking at adopting the temporary solutions not earlier than yearend to give them more time to work on having the law amended by Congress.

Adjusting the input VAT credit limit would mean changes in estimates of the incremental revenue expected from the new VAT law, which has removed exemptions for certain sectors and increased the corporate income tax rate.

The law is currently estimated to generate as much as P105 billion annually starting in 2006. With INQ7.net

Fitch sees improving Philippine debt picture

2005-06-15T10:32:00.000+08:00

Fitch sees improving Philippine debt picture
Posted: 2:26 AM Jun. 15, 2005
Doris C. Dumlao
Inquirer News Service

(Published on page B1 of the June 15, 2005 issue of the Philippine Daily Inquirer)

LONDON-BASED Fitch Ratings has projected a "significantly improved public debt dynamics" for the Philippines following recent progress in fiscal consolidation.

By end-2009, the European rating agency forecast, the national government's debt would be reduced to about 58 percent of the gross domestic product (GDP) from about 71.4 percent in 2004 and to 350 percent of revenues from 494.2 percent last year.

In a special report dated June 8, Fitch Ratings analysts Brian Coulton and James McCormack said the fiscal consolidation -- assuming implementation goes as planned -- would likely lead the Philippine public debt ratios on a firm downward path toward 'BB' norms.

"With a strong likelihood that the tax package will be implemented and with a firm commitment to most of the additional revenue being devoted to deficit reduction, public finances are set to improve sufficiently rapidly over the short and medium term to avoid a downgrade of the ratings," the report said.

Fitch Ratings, which earlier upgraded its outlook on the country's long-term foreign and local currency sovereign credit ratings to "stable" from "negative," revised its Philippine debt projections downward.

It said the landmark value-added tax (VAT) legislation, in particular, involved a broader set of tax measures than originally planned and was likely to haul in P80 billion in revenues or 1.3 percent of GDP in 2006, although this was more conservative than the government's forecast of P100 billion.

"Along with the other tax policy measures that have already been passed as part of the P80-billion package -- including the re-indexation of cigarette and alcohol duties and a lateral attrition law that creates stronger incentives for tax collectors to deliver increased revenue -- the overall effort looks set to raise around P110 billion or 2 percent of the projected 2006 GDP," the report said.

It forecast that the country's debt-to-GDP ratio this year at 70.1 percent, compared with a projection of 77.7 percent contained in its December 2004 report, and to 67.5 percent next year, compared with the previous 75.2 percent.

As a ratio of revenues, government debt is also expected to improve to 459.7 percent this year and 412.3 percent next year, compared to earlier forecasts of 561.5 percent, 527 percent and 488.2 percent, respectively, Fitch said.

Latest Fitch outlook still positive

2005-06-15T10:26:00.000+08:00

Latest Fitch outlook still positive
Despite controversies rocking gov’t
BY KAREN L. LEMA, Senior Reporter
Business World Online

The country’s overall deficit and debt positions are expected to improve in the near term following the passage of key revenue measures, London-based credit ratings agency Fitch said.

Fitch sees the deficit dropping to 2.7% of total economic output next year in line with government targets.

Likewise, it expects government debt to fall to 67.5% of gross domestic product (GDP) by the end of 2006, the lowest level since 2002. Government debt stood at 71.4% of GDP as of end 2004.

"With a strong likelihood that the tax package will be implemented and with a firm commitment to most of the additional revenue being devoted to deficit reduction, public finances are set to improve sufficiently rapidly over the short and medium term to avoid a downgrade of the ratings," Fitch said in a research note.

The research note was dated June 8 and made no mention of controversies currently hounding President Gloria Macapagal Arroyo.

Fitch said it sees no reason why Mrs. Arroyo should not opt to raise the value added tax (VAT) rate next year to 12% from the current 10% despite protests.

"Not to sign would entail a large loss of credibility and make her a ’fiscal crisis’ gambit - whereby she emphasized the threat of financial ruin if politicians failed to agree to tax increases - look very odd indeed," Fitch said.

Some observers have raised the possibility she may defer the increase given her plunging popularity, due in part to tough economic reforms and allegations of poll fraud and family links to illegal gambling.

Revenues as a percentage of GDP are expected to increase to 16.4% next year from the current 13.5%, a significant improvement from the 11.4% in 1998 and 11.6% in 2002.

With the expected increase in tax collections, the ratio of government debt to revenues is projected to decline to 412% by end of 2006 from 494% in 2004.

"While still high in comparison with the median ’BB’ rated sovereigns, this would be the lowest debt to revenue ratio since 2001. It would also be some 75 percentage points lower than Fitch’s previous projections for end 2006," it said.

"The government’s debt service burden, as measured by the ratio of interest payments to revenue, is still expected to remain high at around 38% throughout the forecast period, but is now projected to decline after 2005 in contract with earlier forecasts, where it was expected to intensify overtime," it added.

Fitch recently decided to upgrade its outlook from "negative" to "stable" following approval of the VAT law, indicating that the country was at least no longer in imminent danger of another credit rating downgrade.

US-based Moody’s Investor Service, however, has reiterated its negative outlook with respect to the Philippines sovereign ratings while Standard & Poor’s hinted of a possible outlook change after enactment of the VAT.

Finance Secretary Cesar V. Purisima yesterday said he is certain the government will be able to balance the budget before a 2010 target.

"We are going to beat the program that was set forth and it will be done before 2010," he told reporters.

Foreign investors closely monitoring E-VAT implementation

2005-06-14T09:42:00.000+08:00

Foreign investors closely monitoring E-VAT implementation
By Donnabelle L. Gatdula
The Philippine Star 06/14/2005

The implementation of the expanded value-added tax (E-VAT) law starting this July will be closely monitored by international investor communities, particularly US-based institutional investors, a former top energy official said.

Former Energy Secretary Vincent S. Perez, who came from speaking engagements in the United States, told reporters that "institutional investors in the United States were following closely the congressional deliberations on the VAT bill and silently applauded the passage of the VAT law as a crucial step in the restoration of the fiscal health of the country."

Perez, who now sits as a director in Philippine National Bank, also commended Congress for showing its political will in passing the VAT law with zero-rated VAT for renewable energy.

The former energy official, who resigned from his post last March, described the passage of the VAT law as a watershed in the political maturity of Congress in passing an urgent, critical, albeit unpopular tax measure.

"The VAT law was one of the most difficult legislative decisions that Congress has had to make in recent years, and we must recognize that Congress has shown its political maturity in passing what is generally very unpopular measure," he said.

According to Perez, the VAT exemption or zero-percent VAT rating for the sale of power or fuel generated through renewable sources will boost this particular sector of the power industry.

Renewable energy include biomass, solar, wind, hydropower, geothermal, ocean energy and other emerging energy sources using technologies such as fuel cells and hydrogen fuels.

Perez said this exemption is crucial in promoting this kind of energy sources.

For the Department of Energy’s part, he said the DOE had already launched in May 2003 a comprehensive Renewable Energy Policy Framework.

The framework, he said, was cited as one of the best national renewable energy policies at the May 2004 Ministerial Conference on Renewable Energy held in Germany.

"We hope that more players will invest in developing our untapped renewable energy resources to increase our energy self-sufficiency and advance our march towards energy independence," he said.

NG sets terms for absorbing Napocor debts

2005-06-14T09:41:00.000+08:00

NG sets terms for absorbing Napocor debts
By Des Ferriols
The Philippine Star 06/14/2005

The National Government (NG) has set several conditions before it decides to absorb more of the remaining debts of the National Power Corp. (Napocor), a top Cabinet official said.

Budget Secretary Emilia Boncodin said Napocor would have to show that it has done everything to unload its saleable assets, increased its operating efficiency, and reduced its costs.

The government has absorbed close to P200 billion of Napocor’s debts. However, Boncodin said the government wants to pare down the amount of the remaining debts that would have to be absorbed.

According to Boncodin, the Department of Finance (DOF) is studying the legality of absorbing more than the P200 billion prescribed under the Electric Power Industry Reform Act (EPIRA).

The Department of Energy and the Power Sector Assets and Liabilities Management Corp. (PSALM) earlier estimated that the total debts that Napocor could no longer handle and would have to be absorbed were actually closer to P500 billion.

Boncodin said the remaining P300 billion debts are still marked for possible absorption by the NG but she said the DBCC (Development Budget Coordinating Council) wanted to press Napocor to first try and unload some of its assets as well as improve its operations.

"The idea behind the EPIRA is not to just give Napocor a headstart but also to force it to think of ways to do its part of the rehabilitation program," Boncodin said. "We are not entirely closing the possibility of taking on more of its debt, we just want to put some pressure on Napocor to act on its own."

After the increase in its power generation rates, the sale of its Masinloc plant and the removal of some P196 billion worth of debts from its books, Napocor should have ample room to improve its operations, Boncodin said.

"From a budget planning perspective, what I am looking at is the consolidated public sector debt which will not change anyway," Boncodin said. "The only thing that will have an impact on the budget is the increase in debt service costs and we are monitoring that."

She said the NG would have to ultimately carry some more of Napocor’s debts but wanted to reduce this amount to the barest minimum, narrowed down to debts that Napocor cannot handle even after all the steps already taken.

"We’re not exactly putting that in the backburner, we just want Napocor to do what can still be done on its part and there are still a lot of things it can do before we step in again," Boncodin said. "The NG already has huge debts of its own, it cannot just load up even more without efforts to minimize what we will have to absorb."

The NG has so far absorbed only Napocor debts that came from the NG from its previous re-lending program. These were Napocor borrowings that the NG funded out of borrowings as well.

Debts that Napocor accumulated on its own and would result to a net increase in NG debt burden were not included in the portfolio of obligations that were absorbed by the NG.

’06 budget to hit P1-trillion mark — Recto

2005-06-14T09:40:00.000+08:00

’06 budget to hit P1-trillion mark — Recto
The Philippine Star 06/14/2005

Senate ways and means committee chairman Sen. Ralph Recto said yesterday that the national budget for next year is expected to hit P1 trillion, adding that this budget increase could translate into a wage hike for government workers.

Recto said his assumptions were based on the 10 percent a year growth trend of the national budget and the "chatter" inside Malacañang.

With the 2005 national budget already at P907.6 billion, Recto said that "it’s fairly safe to predict that next year it will hit the P1 trillion mark."

He said Department of Budget and Management (DBM) officials have been working around the P1 trillion figure as the government’s operating budget for 2006.

Because of the expected increase in the budget, Recto predicted "there’s a little something for government workers in the form of a wage benefit."

However, he said the possible pay increase might not be very significant because of the tight fiscal situation the country still faces.

"That will just let (government employees) get by, not get rich," Recto said.

Under the 2005 budget, the payroll for the 1.2 million government workers accounted for P290 billion or 31.9 percent of the P907.6 billion total.

Debt service took up another 33.2 percent of the budget at P301.7 billion.

Another P151 billion was allocated for local government units’ (LGUs) share of the national budget and P72 billion was earmarked for roads, school buildings and other capital outlay expenses.

Recto said that while the budget is expected to increase to P1 trillion, the country’s real growth would be zero "because the increase will just make up for the inflation rate of eight percent and the population growth of 2.3 percent."

"The increment will be to recover the erosion in real value," he said.

President Arroyo is expected to submit the proposed 2006 budget to Congress not later than a month after she delivers her State of the Nation Address (SONA) on July 25.

Congress will then deliberate on the budget separately and come up with amendments or adopt the budget as proposed. If the legislature fails to pass the budget bill on time this year’s budget will be reenacted.

Economic team all set for roadshow

2005-06-14T09:03:00.000+08:00

Economic team all set for roadshow
Posted: 2:21 AM Jun. 14, 2005
Michelle V. Remo
Inquirer News Service

THE GOVERNMENT'S economic team is all set for the international roadshow this month, hoping to convince foreign investors that the Philippines is on track to meet its economic and fiscal targets despite volatility on the political front.

Amid scandals hounding the administration of President Gloria Macapagal-Arroyo, including allegations that the President cheated in the elections and that her family was involved in the illegal numbers game "jueteng," the peso plummeted back to the 55-to-the-dollar level last week. The peso closed at 55.90 to the dollar on Friday.

The recent peso depreciation partly wiped out gains from fiscal reforms and positive developments in the mining industry, which early this year helped the local currency recover from an average of 56.04 to the dollar in 2004.

But Finance Secretary Cesar Purisima, spokesperson of the government's economic team, said the team was optimistic that the economy would not be substantially hurt by the current political "noise," He said the team would tell American and European investors that the country was still well on track to meet its development targets.

"Politics is always a sidelight of things in the Philippines. What's important is that business continues to conduct business. We remain bullish about the country," Purisima told reporters yesterday.

Purisima said the target of reducing the budget deficit this year to P180 billion or below remained achievable, and that investments were still expected to stay healthy.

He said American and European businessmen "will see through this noise. This only shows that we are a mature democracy. The more issues are discussed and cleared, the better."

The roadshow, which will run for a week and a half starting June 21, will cover cities in Europe and the United States. The roadshow, which was planned before the controversies hounding the Arroyo administration hogged the limelight, was intended to update foreign investors on positive developments in the Philippine fiscal sector.

The roadshow will be led by officials of the Department of Finance and the Bangko Sentral ng Pilipinas, the central bank.

The updates will include the new value-added tax legislation and administrative measures to improve revenue collection, and improvements in the government's fiscal health.

Last April, the national government posted a budget surplus of P3.3 billion, the first surplus in four years.

Economic officials were hoping the roadshow would pave the way for a positive market response to the government's planned foreign borrowings before the end of the year. But investors are expected to question the sustainability of fiscal reforms in the Philippines, considering current political jitters caused by calls for President Arroyo to step down.

The government still needs to borrow $850 million from commercial sources to complete its $4-billion foreign borrowing requirement for this year.

Of the $4 billion, $3.1 billion will come from commercial sources, through bond floats, and $900 million from official development assistance. With INQ7.net

Zero VAT on sustainable energy seen attracting capital

2005-06-14T09:02:00.000+08:00

Zero VAT on sustainable energy seen attracting capital
Posted: 8:57 AM Jun. 14, 2005
Inquirer News Service

RETAINING zero-percent value-added tax (VAT) on power and fuel generated through renewable sources should encourage investment in the sector, former secretary of energy Vincent Perez said.

The new tax law gives zero-percent VAT on the "sale of power or fuel generated through renewable sources of energy such as, but not limited to, biomass, solar, wind, hydropower, geothermal, ocean energy and other emerging energy sources using technologies such as fuel cells and hydrogen fuels."

Perez said this provision would support the government's thrust to achieve 60-percent energy self-sufficiency in 2010.

"We hope that more players will invest in developing our untapped renewable energy resources to increase our energy self-sufficiency and advance our march towards energy independence," he said.

Power and fuel from fossil fuels are slapped with a 10-percent VAT, which President Gloria Macapagal-Arroyo may increase to 12 percent in January.

Energy Secretary Raphael Lotilla said the imposition of VAT on fossil fuels should encourage consumers to conserve energy. "The additional VAT should encourage us to use petroleum products more efficiently,'' he said. "This makes renewable [energy sources] more attractive in terms of prices." With INQ7.net

Reforms to continue despite poll fraud, jueteng charges vs Arroyos

2005-06-14T08:58:00.000+08:00

Reforms to continue despite poll fraud, jueteng charges vs Arroyos
BY KAREN L. LEMA and FELIPE F. SALVOSA II, Senior Reporters
Business World Online

The administration’s economic reform agenda will continue to be implemented despite controversies that have led to calls for President Gloria Macapagal Arroyo to step down, threats of impeachment and even talk of another "people power" uprising.

The poll fraud and jueteng payoff allegations against the Arroyos, said Finance Secretary Cesar A. V. Purisima, are "a very unfortunate distraction".

Mr. Purisima, who heads the administration’s team of economic managers, said the country must "gain momentum" considering accomplishments in improving the government’s finances.

Everyone, he said, must "not lose sight of this."

"We in the economic team are continuing to focus on the economy. We have made substantial strides in our effort to consolidate our fiscal position and we need to sustain this," Mr. Purisima said.

The ultimate goal is to "improve people’s lives," he added.

If at all, Mr. Purisima said, the controversies will strengthen the government’s resolve to put the house in order.

He said the government remains confident the business community will "see through" the political noise and recognize the country’s strong macroeconomic fundamentals.

"We are confident for this year we are going to attain all the targets we have set forth at the beginning of the year, we are confident of continued support from the business community and private sector," he told reporters yesterday.

"These political noises can strengthen whatever we have because the more issues are cleared the better, because it will form a stronger foundation for us to continue to reform our economy," he said.

Mr. Purisima added that the economic team is prepared to convince fund managers of the government’s improved fiscal position and the sustainability of its reforms when it embarks on a "no-deal" road show next month.

Analysts have warned of a new round of downgrades in sovereign credit ratings and that the scandals will weaken the President’s ability to implement fiscal reforms.

Mrs. Arroyo recently enacted the new value-added tax (VAT) law that also authorized her to raise the rate to 12% next year from 10% currently. Despite the new tax law and two other reform measures, the government has so far succeeded only in securing a better debt outlook, to stable from negative, from debt rating agency Fitch.

Another agency, Moody’s Investor Service, reiterated its negative outlook on Philippine debt, while Standard & Poor’s had hinted at a better outlook.

A team from the International Monetary Fund last week started a two-week review of the country’s economic and fiscal performance.

Unless the President "takes decisive steps to convince the public she can govern, our economy and business will be in doldrums for a while," political analyst Benito Lim has said.

And until those steps are taken, "there will be doubt and the people will not trust her and her credibility will be in question and it will be difficult for her to tell foreigners to come here," Mr. Lim added.

Peter Wallace of the Wallace Business Forum put a question mark on whether or not the President can raise the VAT to 12% next year given her eroding credibility.

Mrs. Arroyo, he said, must "clear up particularly on the [wiretap] tapes [allegedly proving poll fraud]" since they present "very serious accusations" on her legitimacy.

"The jueteng issue is important but not of the same caliber," Mr. Wallace added.

The wiretap controversy is in fact "very easy to resolve" and sending the tapes to the US Federal Bureau of Investigation or Britain’s Scotland Yard for analysis will do the trick, he said.

"A President very eager to prove her innocence will be willing to do just that," Mr. Wallace said.

He pointed out that there has been much uncertainty in the marketplace as shown by falling stock prices and the rising peso-dollar exchange rate.

"The long term effect of this is on the country’s ability to attract more foreign investments," he said.

Mr. Wallace observed, though, that the controversies have not yet reached the point that they would drive people to the streets in a manner that toppled former presidents Ferdinand Marcos and Joseph Estrada.

"We are not yet at that critical stage. Unlike before, there is no sufficient catalyst and no clear enough alternatives," he said.

In Cebu City, meanwhile, Customs Commissioner Alberto Lina also said the economic team has not been affected by the poll fraud and jueteng controversies.

"We have sufficient revenues to collect. Our economic team is very much in control of the situation. It’s business as usual," he told a press conference here over the weekend.

He said the Customs bureau is confident of reaching its collection target of P150 billion this year. As of the first quarter, the bureau collected a total of P23 billion.

Mr. Lina also said the bureau is winning in its campaign against corruption at the Port of Cebu

Cebu Customs district collector Ma. Lourdes Mangaoang said she recently removed two spot checkers and reviewers and charged them with graft before the Office of the Visayas Ombudsman. -- with a report from Jun P. Tagalog in Cebu City

In US, quiet applause greets passage of RP tax reform

2005-06-13T09:11:00.000+08:00

In US, quiet applause greets passage of RP tax reform
Posted: 10:25 PM Jun. 12, 2005
Abigail L. Ho
Inquirer News Service

Published on Page B8 of the June 13, 2005 issue of the Philippine Daily Inquirer

INSTITUTIONAL investors in the United States view the passage of the expanded value-added tax (VAT) law as a big step in restoring the country's fiscal health, a former Cabinet official said.

Coming from recent speaking engagements in the US, former Energy Secretary Vincent Perez said that institutional investors had been closely monitoring congressional deliberations on the e-VAT law.

"[They] silently applauded the passage of the VAT Law as a crucial step in the restoration of the fiscal health of the country," he said.

He added that the passage of the VAT law showed the political will and maturity of Congress as this was deemed a very unpopular tax measure by many sectors of society.

The VAT law, he said, was "one of the most difficult legislative measures that Congress has had to make in recent years."

In relation to the VAT law, Perez said a provision in the law that gave zero VAT rating to power and fuel generated through renewable sources was another welcome development.

"We hope that more players will invest in developing our untapped renewable energy resources to increase our energy self-sufficiency and advance our march towards energy independence," Perez said.

In May 2003, the Department of Energy launched a comprehensive Renewable Energy Policy Framework, which was cited as one of the best national renewable energy policies in the world during the May 2004 Ministerial Conference on Renewable Energy held in Germany.

The DOE is pushing for the use of renewable energy sources as it aims to achieve 60-percent energy self-sufficiency by 2010 in light of volatile world oil prices.

Tight fiscal policy delays ODA-funded infra projects

2005-06-13T09:10:00.000+08:00

Tight fiscal policy delays ODA-funded infra projects
Posted: 10:31 PM Jun. 12, 2005
Christine A. Gaylican
Inquirer News Service

Published on Page B9 of the June 13, 2005 issue of the Philippine Daily Inquirer.

THE GOVERNMENT's belt-tightening measures have been causing delays in the implementation of various infrastructure projects nationwide, the National Economic and Development Authority said.

Roads and bridges construction projects financed by the Japan Bank for International Cooperation, World Bank, the Asian Development Bank and multilateral donors are now experiencing delays due to constraints in the budgets of various government agencies. For such projects, concerned government agencies need to come up with counterpart funds.

This is one of the major factors that adversely affected the implementation of some 156 development projects, Neda project monitoring director Victor Emmanuel Dato said, quoting the preliminary report of his unit.

"We have less budget cover for loans that require counterpart funds," Dato said.

Dato explained that Congress' failure to approve a national budget last year has led to the 'reenactment' of the government's budget in the previous year. This meant no specific budget was earmarked for new development projects.

According to Presidential Economic Adviser and Albay Rep. Jose Sarte Salceda, this is one of the consequences of the tight fiscal policy adopted by the Arroyo administration.

"This is expected to remain in the next two years as we tighten up on our foreign borrowings. As we go along, we can make adjustments," Salceda said in an interview.

In the last four years, ODA (official development assistance) commitments have been declining because of the emphasis given by the government on project quality and fiscal tightening. From a peak of US$13.3 billion in 2000, ODA loan commitment amounted to $10.9 billion as of Dec. 31, 2003, which is 8 percent lower than the 2002 figure.

Japan, through the Japan Bank for International Cooperation (JBIC), remained the largest source of ODA loans, accounting for 62 percent (or US$6.8 billion with 79 loans) of the total ODA loans granted to the Philippines.

The Asian Development Bank (ADB) followed with 14 percent (or US$1.6 billion) while the World Bank had a share of 13 percent (or US$1.4 billion ).

Other Sources (like Australia, Austria, China, Danida, European Investment Bank, France, Germany, IFAD, Korea, Kuwait, Nordic Development Fund, Opec, Spain and the United Kingdom) accounted for the remaining US$1.1 billion or 11 percent of the total ODA loans portfolio.

Palace wants to revise VAT law to appease traders

2005-06-13T09:09:00.000+08:00

Palace wants to revise VAT law to appease traders
Posted: 10:34 PM Jun. 12, 2005
Gil C. Cabacungan Jr.
Inquirer News Service

Published on Page B8 of the June 13, 2005 issue of the Philippine Daily Inquirer.

NEARLY three weeks after finalizing the changes to the expanded value-added tax (VAT), Malacañang wants to revise the much debated tax measure to appease businessmen wary of shrinking profit margins.

Presidential Consultant for Investor Relations Corazon Guidote said that the Department of Finance has put on review one of the provisions in Republic Act No. 9337 or the Expanded VAT Act of 2005 which imposed a 70-percent cap on the VAT that they could pass on to their consumers.

The DOF was forced to seriously consider the possibility of raising the cap to as much as 90 percent after businessmen complained that they could not absorb the 30 percent because it would further add to their losses since most companies have less than 10 percent profit margins.

The 70 percent cap on quarterly input credits was inserted during the protracted deliberations on the expanded VAT as a means to ease the impact of higher taxes on consumers.

Although its purpose was noble, businessmen felt it was unfair to compel them to absorb all the tax costs because it would undermine their operations.

Lawmakers had previously adopted a no-pass-on provision on oil and energy companies that would force them to absorb the entire 10-percent VAT.

But this provision was dropped during the bicameral conference after oil and energy companies warned that this would affect the viability of their operations.

The pending changes in the newly signed expanded VAT law comes on the heels of a petition seeking to block its implementation.

The expanded VAT, which was signed by the President with little fanfare on May 24, basically removes the VAT exemptions enjoyed by select sectors and gives the President a standby authority to raise the VAT rate from 10 percent to 12 percent starting January next year if revenue collections do not improve to desired levels.

The expanded VAT law takes effect next month.

The new VAT law is expected to raise an additional P28.75 billion for the government this year and P105.23 billion in its full year of implementation. This is largely due to improved collection efficiency beyond the current 70 percent, with the removal of exemptions enjoyed by doctors, lawyers, and cooperatives, as well as the sale and importation of coal, natural gas, and petroleum products, and books and magazines.

The expanded VAT law is expected to bring down to zero the budget deficit by 2008.

No Free Lunch: Municipal bonds, anyone?

2005-06-13T09:04:00.000+08:00

No Free Lunch: Municipal bonds, anyone?
Posted: 8:24 PM Jun. 12, 2005
Cielito Habito
Inquirer News Service

Published on Page B2 of the June 13, 2005 issue of the Philippine Daily Inquirer

WHAT do the Eiffel Tower in Paris, the Golden Gate Bridge in San Francisco and the Taipei 101 Tower--currently the tallest building in the world--have in common? Answer: These world landmarks have been financed wholly or partly by municipal bonds.

In the Philippines, provincial, city and municipal governments are only beginning to discover the usefulness of floating bonds to fund their various infrastructure projects, particularly income generating ones. And yet, local government bonds have been around for centuries in other countries. In the United States and other mature economies, municipal bonds account for a substantial portion of all bond issuances in their capital markets. In the US, about $420 billion worth of municipal bonds were issued last year, and a total of $2.1 trillion were outstanding and actively circulating.

What they are
Municipal bonds or "munis" are debt securities that local government units (LGUs) issue to raise money for public projects, such as public markets, fish ports, bus terminals, hospitals, low cost housing and other special projects. When you buy a municipal bond, you are lending money to the LGU that issued the bond. In exchange, the borrowing LGU promises to pay you a specified amount of interest, usually semiannually, and return your money, also known as "principal," on a specified maturity date. Municipal bonds issued in the Philippines have had maturities up to seven years.

Among our better-known municipal bond-financed projects is the Caticlan Jetty Port, familiar to anyone who has been to the resort island of Boracay in recent years. The province of Aklan floated P40 million of bonds in 1999 to build this facility, and continues to service the debt today. More recent municipal bond floats have been much bigger, including those for Tagaytay City's P220-million convention center and Antipolo City's P400-million commercial complex.

Alternative modes
There are two other ways that an LGU may fund a project other than using its internal revenue allotment (IRA) from the national government or locally generated revenues, especially from real property taxes and local business taxes. The LGU may secure a loan from a government financial institution (GFI) like the Development Bank of the Philippines (DBP), Land Bank, or Philippine National Bank. For the GFI, the loan is virtually risk-free as the LGU's IRA normally becomes direct collateral for the loan, which means that in the event of default, the GFI can intercept the borrower LGU's IRA from DBM.

The other way is for the LGU to go via the build-operate-transfer (BOT) mode, whereby a private firm constructs the facility and is given the right to operate it and collect user fees until it is able to recover its investment and a reasonable profit. Each financing mode--whether bonds, GFI loans or BOT--has its own advantages and disadvantages, and which one would be most appropriate depends on circumstances and the nature of the projects to be financed.

Deeper capital markets
One of the advantages of bond financing is the way it helps widen and deepen the capital markets. In particular, it expands the range of choices of investment instruments available to savers/investors. For one thing, municipal bonds can help channel OFW remittances and rural savings towards development of the localities where their families reside, thereby giving them a direct stake and involvement in improving their communities. Tagaytay City specifically allotted a portion of the bond float for its convention center to small savers, thereby enabling its citizens to have a direct stake in the facility.

Elsewhere, municipal bonds are a popular investment instrument for small and large savers alike, especially because their earnings are usually tax exempt. Such tax exemption is necessary to offset the added transaction costs (underwriting fees, guarantee fees and other costs) associated with floating a local bond as against simply taking a GFI loan. Without such exemption, LGUs are likely to favor bank loans, and investors would have little incentive to buy the bonds over alternative interest-earning assets like T-bills and trust accounts. Thus, the main buyers for our municipal bonds so far have been the big banks themselves, making the bond issues no different from a syndicated loan to the LGU. Furthermore, many of the bond flotations are being prepaid before maturity by the issuing LGUs and converted to loans by GFIs, who are happy to push more loans with risk-free clients such as LGUs. But such practice undermines the capital market-deepening effect of municipal bonds.

Wanted: a clear policy
In reality, there is still no explicit government policy to promote LGU bond financing. For the reasons described above, there should be. This requires that the usual tax exemptions be granted on LGU bond earnings. It also requires that there be a good credit rating system for LGUs, and a good LGU credit guarantee mechanism in place. Both are already being partly fulfilled by the LGU Guarantee Corp., but needs further expansion to widen its scope and coverage. And for LGU bonds to be instrumental in deepening our capital markets, we need to have a well-working fixed income exchange, i.e. the counterpart of a stock market for trading fixed-income assets like bonds. We have taken baby steps in these directions; it is time to make greater strides so that through better local resource mobilization, we can help ease the fiscal bind the national government is in.

NG debt down to P3.869T in March

2005-06-10T07:58:00.000+08:00

NG debt down to P3.869T in March
By Des Ferriols
The Philippine Star 06/10/2005

The total debt burden of the National Government (NG) dropped further from over P4 trillion to only P3.869 trillion as the Bureau of Treasury (BTr) made adjustments to remove the assumed debt of the National Power Corp. (Napocor) that officials said were previously double-counted.

The adjusted total NG debt for March was still 11.7 percent more than the debt level recorded in March last year of P3.465 trillion and 1.5 percent more than the end-December level of P3.812 trillion.

National Treasurer Omar Cruz explained yesterday that the official NG debt data released since January included some P196 billion worth of NPC debt that had been absorbed by the NG, bringing the total to a little over P4 trillion.

According to Cruz, however, the Napocor debt that have been loaded into the total NG debt burden should not have counted as incremental debt since these were already reflected in the NG debt figures from the start.

"Simply put, the NG incurred the foreign debt and re-lent the proceeds to Napocor since it could not go directly to the market to raise funds for itself," Cruz explained.

The Napocor then issued bonds to the NG in exchange for the borrowing and the bonds were booked as assets of the NG. The Napocor continued to service these borrowings and the NG in turn serviced its foreign borrowing from the proceeds of Napocor’s payments.

Since the Napocor was no longer able to service the debt, Cruz said the NG decided, in effect, to write them off by canceling the Napocor bonds from its books.

"In effect, we had to assume Napocor’s debt and then cancel the bonds that are in our books as assets," he said. "So the net result is a wash transaction. That debt should never have been booked twice in the first place."

The correct figure for total NG debt in January 2004, Cruz said, was P3.810 trillion against the announced figure of P4.01 trillion. For February, the total NG debt was P3.885 trillion against the announced figure of P4.08 trillion.

Budget secretary Emilia Boncodin said the portion of NPC’s debt that the NG absorbed were double-counted since the portion of the transaction that were booked only represented the assumption of the total of P196 billion.

"From a budgeting standpoint, my only concern is the impact of incremental interest payments on the budget," Boncodin said. "Since NPC will no longer be servicing these debts, the NG will then service them on its own."

Before the NPC debt was transferred to the NG, Boncodin said the NG only needed to spend part of the debt service cost since the NPC was paying the NG. Now, the whole cost would be shouldered by the NG to the extent of about P18 billion this year.

By 2006, however, Boncodin said the NG would have to start retiring some of NPC’s maturing obligations.

The BTr, on the other hand, broke down the total NG debt into P2.059 trillion of domestic debt in March 2005 and P1.81 trillion of foreign debt.

Cruz said total domestic debt increased by 16.8 percent from last year but declined by 0.1 percent compared to the February 2005 level. On the other hand, NG’s foreign debt increased by 6.3 percent compared to last year and declined by 0.7 percent compared to last month.

Cruz said there were indications that the NG debt has begun to plateau, reporting net redemption of about P1.5 billion so far this year.

Cruz told reporters yesterday that while there was no significant net decline in total NG debt stock, the national government has started to redeem more of its domestic debt than it was borrowing.

"It’s a start," Cruz said. "We plan to maintain this trajectory."

ANALYSIS: VAT - Opportunity for BIR to shine or fall

2005-06-10T07:55:00.000+08:00

ANALYSIS: VAT - Opportunity for BIR to shine or fall
Posted: 2:28 AM Jun. 10, 2005
Paul R. Cooper
Inquirer News Service

Published on page B6 of the June 10, 2005 issue of the Philippine Daily Inquirer

(Fifth of a series)

THE SENATE had it right at the start of the bill process. If value-added tax (VAT) collections are P138 billion per year, but the estimated VAT base is P250 billion per year, why is the Philippines imposing new taxes? Surely the focus should be on collecting taxes that are already payable.

The reality is that nobody knows the true extent of the VAT leakage, and it is hard to believe that the Bureau of Internal Revenue (BIR) and the Bureau of Customs could fail to collect 45 percent of the potential VAT base. After all, the VAT is accepted internationally to be one of the easiest taxes to administer.

Perhaps the answer lies in voluntary compliance; or rather a lack of it.

Comments by the previous BIR commissioner suggest that 98 percent of Philippine tax collections come from voluntary compliance and only 2 percent from audit activity. Don't be surprised at the ratio between the two; it is not wildly different from what other countries experience.

The current state of play

The message should be clear though. If a country really wants to improve its tax collections, it is likely to be far more successful by looking at ways to improve voluntary compliance, rather than pursuing errant taxpayers with a big stick. The latter approach will still have some impact. However, the gains may not be as great.

Complying with the VAT rules in the Philippines presents a challenge. The Tax Code provisions are generally fairly well drafted, but do contain some holes. How should agency sales be documented to ensure there is no VAT leakage? What is the proper way to account for VAT on an installment or hire-purchase sale? When should a service that requires the use of infrastructure for delivery (e.g., telecommunications services) be considered to be performed in the Philippines? At the end of the day though, solutions may be derived to these questions that fit within the framework of the law.

The real problem is that, to ascertain how the BIR will interpret and apply the law, a person needs to reconcile more than one dozen revenue regulations, some of which conflict with each other, and some of which conflict with the Tax Code.

A step back

Ironically, even the BIR does not have a set of consolidated regulations dealing with the value-added tax ... yet it expects taxpayers to comply with them! Add to that the volume of circulars and rulings that taxpayers need to be aware of, and the result is messy!

One can also take a step further back. It is accepted internationally that taxpayer education is a critical feature in making VAT work well. The obvious place for a person to start when trying to determine his VAT obligations when starting a new business would be an easy-to-read VAT guide published by the BIR ... which doesn't exist. How then does a taxpayer find out that it is absolutely critical to hold proper VAT invoices and VAT official receipts if he wants to claim a VAT input tax credit? Currently, many are finding out the hard way, when the BIR raises the issue in audit.

Add to that the fact that once the government has collected tax, it is extremely reluctant to refund it again. Is it any wonder that taxpayers do not voluntarily comply with their obligations if: (a) the BIR does not make it easy to ascertain those obligations; and (b) the BIR is not perceived to be fair and even-handed with money belonging to taxpayers?

In business, goodwill is an important concept. Not surprisingly, successful businesses tend to have more of it.

Message to the BIR

Two provisions in the VAT bill cut to the heart of the compliance problem:

Under Section 23 of the bill, the BIR must, by June 30, 2005, issue implementing rules and regulations. Significantly, once those regulations are issued, all existing VAT rules and regulations are revoked. The BIR now has no choice but to do something it should have done a long time ago -- prepare a single coherent set of VAT regulations.

Under Section 21(E) of the bill, P15 million is appropriated to the BIR for a public information and education program, explaining to businesses through seminars, taxpayer visits and the preparation and publication of easy to read guides, their obligations under the VAT law.

For the second issue, the amount of the appropriation is probably secondary to the message from Congress that the BIR needs to undertake such initiatives.

It is disappointing though that the bicameral conference removed the requirement for the BIR to complete the program by Dec. 31, 2005. The timeframe in the Senate bill made sense, given that the bill introducing new invoicing rules will take effect on Jan. 1, 2006. The education campaign should still proceed; the only difference now is that the campaign must proceed because effective tax administration demands it.

Let us hope that the BIR rises to both challenges.

Leverage the new rules

The VAT bill makes significant changes to two administrative areas: VAT registration and de-registration, and VAT invoicing.

For registration and de-registration, the changes are fairly mechanical. The registration threshold has been increased from P750,000 per year (Revenue Regulations No. 1-95) to P1.5 million per year, and the rules for determining when registration must-and deregistration may-occur have been made more precise.

There is one nasty fishhook the BIR must communicate though. If a taxpayer meets the requirements to register for VAT but fails to do so, the taxpayer will be liable to account for 10-percent VAT on their sales, but will not be entitled to claim input tax credits. That is a nasty sting if the BIR does not make taxpayers more wary.

Changes to the invoicing rules are more complex. Under the House version of the bill, taxpayers would have been required to change their accounting records to show VAT separately on their invoices and receipts fifteen days after the new law was published. The Senate version of the bill (adopted in the final bill) is more realistic, so that taxpayers have until Jan. 1, 2006 before they must show VAT separately.

It also includes more explicit rules on how VAT-exempt and zero-rated sales should be documented, and requires a VAT invoice to be issued for the sale of goods and a VAT official receipt to be issued for the sale of services. (How many taxpayers are aware that the Court of Tax Appeals has interpreted existing law in this matter?)

The sanctions are also more explicit if taxpayers get it wrong. A non-VAT-registered person who issues a VAT invoice or VAT official receipt must account for the VAT without the benefit of input tax credits, and is also liable to a 50-percent fraud penalty.

Perhaps the most significant amendment the BIR could pick up on is that for sales of less than P1,000, the name and TIN of the purchaser will no longer need to be shown before a VAT invoice or VAT official receipt may be used to evidence a claim for an input tax credit.

From an administrative perspective, it is difficult to stress the importance of VAT invoices or official receipts if the law places unreasonable requirements on taxpayers (current law requires the name and TIN of the purchaser on any sale between VAT-registered persons, even if the transaction is for only P1).

The BIR has an excellent opportunity to demonstrate that it can respond to the challenges created by the bill, so is worthy of aspiring to join the ranks of top level international tax administrations.

Leveraging the new registration rules and invoicing rules in an effective taxpayer education campaign will be worthy of applause if the BIR pulls it off. The real icing on the cake though would be if the BIR could also pull off the impossible: getting prepared sufficiently fast so it can deal with small businesses that become liable to VAT on July 1, 2005 because their VAT exemptions have been repealed.

This is a task that I suspect may be beyond the BIR. But if Congress enacts laws whose effective dates are too tight, who can blame the BIR? It was within the power of Congress to provide sufficient lead-time for small businesses.

(To be continued)

The author is a tax expert and a director of PricewaterhouseCoopers.

Gov't debt slightly down to P3.87 trillion

2005-06-10T07:54:00.001+08:00

Gov't debt slightly down to P3.87 trillion
Posted: 2:12 AM Jun. 10, 2005
Inquirer News Service

THE NATIONAL government's debt stock reached P3.87 trillion in March, slightly down from P3.885 billion in February, which the Bureau of Treasury said indicated that the debt curve was starting to level off, reflecting the government's improving financial position.

Of the March total, P2.06 trillion or 53.22 percent was domestic debt. Foreign debt was P1.81 trillion, 46.78 percent of the total.

Although the government continued to borrow because of its huge budget deficit, the Treasury said the level of borrowings had been decelerating.

National Treasurer Omar Cruz said the 0.4-percent month-on-month decrease reflected net redemption of government securities and net appreciation of other foreign currencies against the US dollar.

Cruz said the national government would start to record real and significant decreases in debt when it succeeded wiping out its budget deficit.

"Right now, the trajectory of our debt [curve] is flattening," he said. "When we begin to hit a surplus, targeted in 2008, then that will be the real point of inflection."

The government has set a target ceiling for the budget deficit of P180 billion this year, from P187 billion in 2004. The Department of Finance has projected that the deficit may drop to as low as P151 billion because of a new value-added tax law that expands the coverage of the tax.

The March debt figure was computed according to an adjusted accounting system adopted by the Treasury. With INQ7.net

Finance dept unit trims tax credit approvals to P2.8B a year

2005-06-10T07:54:00.000+08:00

Finance dept unit trims tax credit approvals to P2.8B a year
Posted: 2:24 AM Jun. 10, 2005
Michelle V. Remo
Inquirer News Service

Published on page B4 of the June 10, 2005 issue of the Philippine Daily Inquirer

THE ONE-STOP Shop Duty and Credit Drawback Center (OSS), a unit of the Department of Finance handling tax credits, said it had reduced the amount of tax credits it had been granting by about P9.1 billion a year.

OSS executive director Ernesto Hiansen said his office had been approving an average of P11.98 billion worth of tax credits yearly from 1995 to 1998. Starting 1999, the yearly average dropped to only P2.84 billion.

"We have denied quite a number of (tax credit) claims, and we have raised our standards in approving applications for tax credits. As you very well know, there had been a lot of tampered, fake and used TCCs [tax credit certificates] being sold and re-used," Hiansen said in a press briefing yesterday.

According to OSS estimates, the government lost about P5.3 billion in revenue due to tax credit fraud. The illegal activity, which proliferated in the 1990s and detected in 1998, was done either by securing fraudulent TCCs, or selling fake TCCs. TCCs are used in paying taxes and duties.

Hiansen said the OSS also improved the materials used in making TCCs to make sure they could not be easily copied. The OSS has also employed stricter monitoring of applications to prevent fraudulent tax credit claims, he said.

Couple Faustino and Gloria Chingkoe accounted for the single biggest tax credit fraud recorded by the agency. Authorities are after the couple for allegedly defrauding the government of some P2.5 billion through sale of fraudulently secured TCCs.

Hiansen said the Office of the Special Prosecutor, one of the agencies that committed to pursue cases of tax credit fraud, had submitted a letter to the Department of Justice seeking speedy extradition proceedings against Mrs. Chingkoe, who is in Canada. Mr. Chingkoe is in the Philippines and has been served an arrest warrant. He is out on bail.

Various government agencies earlier agreed to form a group that would pursue tax credit fraud cases. These were the OSS, the Office of the Special Prosecutor, the Office of the Ombudsman, the Bureau of Internal Revenue and the Bureau of Customs.

Government records slight gain in debt tally

2005-06-10T07:48:00.000+08:00

Government records slight gain in debt tally
BY KARL LESTER M. YAP, Reporter
Business World Online

Fiscal reforms and a weak dollar in the first quarter helped the government improve cash flow and lessen borrowings, resulting in a slight reduction in the country’s outstanding debt.

Latest figures released by the government yesterday showed that the state’s outstanding debt declined 0.4% to P3.869 trillion in March from a revised P3.885 trillion for February.

Year on year, government debt was up by 11.7% in March from P3.465 trillion in the same month last year.

Foreign creditors accounted for nearly half of that with P1.81 trillion while government owed P2.06 trillion to domestic creditors.

"The decline in the domestic debt by P2 billion... is attributed to the net redemption of government securities by the national government," National Treasurer Omar T. Cruz told reporters yesterday.

Mr. Cruz attributed the P14 billion decline in foreign debt to the appreciation of other currencies against the dollar. Some of the country’s foreign debts are euro and yen denominated.

He stressed that the government is finally able to rein in its debt.

"This is a possible indication that the movement of national debt is no longer accelerating or surging," Mr. Cruz said. "Compared to other years, [debt] growth is slowing down."

"If the fiscal deficit slows down, then the trajectory of national government debt stock also flattens," Mr. Cruz added.

However, Mr. Cruz said the country will have to wait for a few more years before national debt starts to go down substantially.

"In 2008 or earlier... that’s the time when we have a real surplus and where we can finally see debt levels going down," he said.

The government updated debt figures for January and February as it completed the accounting of National Power Corporation (Napocor) debts it assumed last January.

"When government decided to assume the P200 billion Napocor debts last January, government wrote off debt payments from Napocor which formed part of its assets. But government’s debt level remained unchanged," Mr. Cruz said.

What has changed is that it is now up to the administration, not Napocor, to raise funds to pay these obligations.

"The cash requirements of the government has increased since government is no longer getting interest payments from Napocor," he explained.

The government earlier reported that national debt in February and January came in at P4.08 trillion and P4.01 trillion, respectively.

IMF team starts 2-wk review of RP economy

2005-06-09T07:39:00.000+08:00

IMF team starts 2-wk review of RP economy
The Philippine Star 06/09/2005

A team from the International Monetary Fund will start today a two-week review of the Philippine economy, checking whether the government has implemented policies required by the IMF in exchange for emergency funds.

During a review in November, an IMF team said the Philippines must step up its fiscal reform efforts – improving the growth outlook amid weakening exports, bolstering the banking system and dealing with a large budget deficit – to boost investor confidence.

Since then, the government has passed three tax measures, including revisions to the value-added tax that would increase revenue. The government also posted its first monthly budget surplus in four years in April.

The Philippines has been under an IMF program of one sort or another since 1962. In early 1998, Manila obtained an extension of its program as a shelter from the Asian currency crisis that was still unfolding.

It entered a two-year $1.38-billion standby credit for balance-of-payments support. It forfeited a $300-million loan in October 2000 after failing to meet a government deficit target set as a loan condition.

A seal of good fiscal housekeeping from the IMF is sometimes used as a proxy for a rating from international credit rating agencies, which often determines the cost of the country’s foreign borrowings.

DOF expects 30% decline in excise tax collection

2005-06-09T07:38:00.000+08:00

DOF expects 30% decline in excise tax collection
By Des Ferriols
The Philippine Star 06/09/2005

The Department of Finance (DOF) is expecting an up to 30-percent initial decline in excise tax collection after the increase in the tax rate. However, government officials said they expect collections to pick up by the end of the year.

DOF officials said any new change in taxes usually results to an initial drop in collections of up to 30 percent as industries adjust to the new regime, usually by building up inventory right before the effectivity of the new measure.

Finance Undersecretary Gil Beltran explained that this reaction to the imposition of new taxes, especially excise taxes, was historical and not surprising.

"They react this way because naturally, businesses want to pay the least allowable tax they have to pay," Beltran said. "So usually there is a build up of inventory right before the new law or new measures become effective and that inventory would be covered by the older and lower tax."

The DOF has been at pains to explain why excise tax collections dropped during the months that followed the full implementation of the excise tax on alcohol and tobacco.

According to Malacañang sources, however, the tax collection from the tobacco industry was more skewed than most, with only one company reporting a decline in tax payments, specifically Fortune Tobacco.

"Companies like Philip Morris actually increased their tax payments," the source said, speaking on conditions of anonymity.

Beltran said this will be verified once the DOF completes its examination of the excise tax collection since the new excise tax law became effective.

In the first two months of the year alone, the Arroyo administration suffered a 30 percent decline in its revenue collection from the taxes on tobacco products.

Data from the DOF showed that although total collections in January and February surpassed expectations, there was a deep cut in tobacco tax collections compared to 2004 collections.

Reports from the DOF indicated that the total excise tax collections for January to February amounted to P8.138 billion, lower than the 2004 level of P8.268 billion but still more than the P6.036 target for the period this year.

This amount included the excise taxes on alcohol products, tobacco products, petroleum products, mining and mineral products, tobacco inspection fee and taxes on miscellaneous products.

According to the DOF, the excise tax on alcohol alone generated revenues amounting to P3.096 billion during the first two months of the year. This was about 42 percent more than the P2.18 billion target for the period and almost 30 percent more than the amount collected over the same period in 2004.

The performance of the tobacco sector, however, was drastically different.

Collection of the excise tax on tobacco amounted to P2.295 billion for the first two months, over 50 percent in excess of the P1.522-billion target.

However, this year’s collection was 30.5 percent lower than last year’s collection of P3.302 billion.

According to Beltran, however, even tobacco excise tax collection would have to pick up in the next few months since tobacco companies would have to run out of old inventory eventually.

"The shelf life of cigarettes is only six months," Beltran said. "It’s not unheard of for collections to drop this way but eventually, collections will pick up. If they don’t, then we have a problem."

Opposition senators to file anti-VAT petition before SC

2005-06-09T07:37:00.000+08:00

Opposition senators to file anti-VAT petition before SC
The Philippine Star 06/09/2005

Seven senators belonging to the Senate minority bloc will file a petition before the Supreme Court today to declare President Arroyo’s authority to raise the value-added tax (VAT) rate as unconstitutional.

In a 28-page petition, Senators Aquilino Pimentel Jr., Sergio Osmeña III, Jamby Madrigal, Jinggoy Estrada, Panfilo Lacson, Alfredo Lim and Luisa Ejercito argued that "the power to tax is inherently legislative in character and as such should not be delegated unless expressly allowed by the Constitution."

Quoting Article 6, Section 28 of the Constitution, the senators pointed out that the power that may be delegated to the President only covers tariff rates, import and export quotas, tonnage and wharfage dues and other duties and imposts.

They noted, however, that the Constitution is silent on the authority of the President to increase the rates of internal revenue taxes, including the VAT.

Sen. Ralph Recto, principal sponsor of the VAT bill in the Senate, argued that they are not delegating the power to the President.

"We’re not delegating the power to adjust the VAT. It is automatic upon certain conditions. Certain conditions have been set. The law is complete in itself," he explained.

Under Republic Act 9337, which was approved by Mrs. Arroyo last May 24, the President is mandated to raise the VAT rate from 10 to 12 percent effective Jan. 1 next year if either of the following conditions are met: VAT collection as a percentage of gross domestic product of the previous year exceeds 2.8 percent, or the national government deficit as a percentage of GDP of the previous year exceeds 1.5 percent.

The VAT increase violates the Constitution since it imposes an unfair and additional burden on the people, the senators said.

Pimentel said they will ask for a temporary restraining order on the implementation of the bill which is set to commence on July 1.

If granted, this would disrupt the government’s revenue targets for this year. — Marvin Sy

ANALYSIS: Counting the cost of politics in the VAT law-2

2005-06-09T07:35:00.000+08:00

ANALYSIS: Counting the cost of politics in the VAT law-2
Posted: 1:33 AM Jun. 09, 2005
Paul R. Cooper
Inquirer News Service

Published on Page B2 of the June 9, 2005 issue of the Philippine Daily Inquirer

(Fourth of a series)

IF the matter weren't so serious, it would be amusing.

Last year, Congress approved a measure exempting lawyers from value-added tax (VAT), but the language of which created confusion and certain problems that were "corrected" by the Bureau of Internal Revenue administratively.

This year, Congress removed the problem by successfully bringing lawyers back into the VAT base. However, Congress has created other problems affecting the government itself.

Many contractors may already be wondering whether contracting with the government is worth the effort, after recent executive initiatives that make tax clearances a prerequisite for any government contract. A new "final" withholding may now encourage those who are still persevering to reconsider. The bottom line: The government can expect to pay more for goods and services once the VAT measure takes effect.

Gov't caught by its own sting

One of the stranger measures introduced in the bicameral conference was the requirement for the government and its agencies, including government-owned or -controlled corporations (GOCCs), to deduct a final 5 percent VAT from payments for goods and services, or 10 percent if the payment was for the lease of property from a non-resident. The consequences of which are the following:

The government will end up paying more for goods and services. From a businessman's perspective, the special 5-percent rate should not cause any pricing problems. The law prevents the government from obtaining goods and services without going through a tendering process, so persons bidding for a procurement or supply contract can price the VAT into their bids.

GOCCs will be made less competitive. They will pay more for their inputs, they presumably will not be able to claim input tax credits for the withholding VAT (isn't that the effect of a "final" tax?), and will still be liable to 10-percent output VAT on their sales. That amounts to a fair bit of VAT (more than the normal 10 percent, because of the cascading effect of the taxes) in their final sales price.

Enter the lawyers (again). What does the law really mean by "final" VAT? Under Section 110(A), "any input tax evidenced by a VAT invoice or official receipt ... shall be creditable against the output tax." If a business makes VAT-exempt sales, there is a special rule in Section 110 that apportions input taxes and has the effect of disallowing input tax credits relating to VAT-exempt sales. There is, however, no corresponding rule dealing with sales subject to a 5-percent final VAT. If Section 110 is read strictly, it could be interpreted to allow a person making sales to the government to claim a full input tax credit. It could also be interpreted to allow GOCCs to claim an input tax credit for the 5 percent final withholding VAT.

How does one reconcile the 5 percent final withholding VAT with Section 110? At a technical level, the answer is that if the law is ambiguous, one looks to the intent of the drafters to derive the meaning. That works fine in a transparent lawmaking process. It does not work so well if there is no public record of the trade-offs that have been made in political dealings. Ultimately, the Bureau of Internal Revenue (BIR) will probably have to make a line call in the regulations; not an ideal way for a law to be created.

Debates will continue for years on when exactly the VAT rate increases.

Standby authority

This leads us to the really interesting, and contentious, issue of the President's standby authority. First, we need to get one thing straight. The President has no authority. The buck stops with the secretary of finance. If he recommends the rate increase, the President has no choice, she "shall" increase the rate to 12 percent. So who will really catch the political fallout from an increase? The words, "I had no choice in the matter," come to mind.

One of the interesting things about the standby authority is that it may mean all things to all people. This can be useful in a consensus environment. It allows a measure to proceed, while the participants can sit back later and say, with all honesty, "that's not what I understood the provision would do when I agreed with it."

The provision in question reads: "Provided, that the President, upon the recommendation of the secretary of finance, shall, effective Jan. 1, 2006, raise the rate of value-added tax to 12 percent, after any of the following conditions has been satisfied: (i) Value-added tax as a percentage of gross domestic product (GDP) of the previous year exceeds two and four-fifth percent (2 4/5 percent) or (ii) the national government's deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1-1/2 percent).

Undoubtedly the intention was that some time after Jan. 1, 2006, once the National Accounts for 2005 have been finalized, the secretary of finance will be able to sit back, confirm that the criteria is met (nobody has any doubt that the deficit will exceed 1.5 percent of GDP this year), and recommend the increase. Thus, the new rate could not kick in until sometime toward the middle of next year.

Undoubtedly the intention was also that sometime before Jan. 1, 2006, possibly even as early as July 1, 2005, when the new law will become effective, the secretary of finance will be able to sit back, confirm that the criteria is met (the data already confirms the deficit for last year [2004] exceeded 1.5 percent of GDP), and recommend the increase. Thus, the new rate will apply starting Jan. 1, 2006.

It all depends on which side of the fence you sit. Who will win? Based on the drafting of the law, the rate should apply from Jan. 1, 2006. In my view, the word "effective" is connected with when the new rate will take effect, not when the President may exercise the "authority." As the new law takes effect on July 1, 2005, the secretary of finance any time between July 1, 2005 and Dec. 31, 2005 could recommend the increase, based on the implementation criteria being met for 2004.

For the record, undoubtedly the intention was that sometime after Jan. 1, 2006, the secretary of finance will be able to sit back, confirm that the criteria is met, and recommend the increase, retroactive to Jan. 1, 2006. That way, the government could sting the business community for an additional 2 percent output VAT (under the law, businesses are liable to account for output VAT, whether they bill it or not) without having to grant a corresponding adjustment for input tax (nobody will hold the requisite invoices or official receipts to support a claim for input tax at the higher rate). No, I don't really believe this could happen -- it is reasonable to expect the Supreme Court, in three to four years time, to confirm that such an act is not constitutional because it amounts to retroactive legislation. But in an environment when the attitude of the executive branch to tax collections seems to be to capture as much tax as it can find without regard to the economic consequences (and occasionally the legalities of the practices being pursued) does give one cause to wonder, in fleeting moments, if the government could stoop to such underhanded tactics.

Where to from here?

The question might be better phrased as, "When will we learn?"

It should be clear to any observer that the Philippine tax system is not working, this is one of the reasons the VAT bill was initiated. Congress must also take some of the blame for passing measures that are far less precise than they might be. The last article in this series will look at whether an effective and transparent process be established to enable coherent tax laws to be passed in the Philippines.

The author is a tax expert and a director of PricewaterhouseCoopers.

Finance dept seeks uniform perks for economic zone locators

2005-06-09T07:34:00.000+08:00

Finance dept seeks uniform perks for economic zone locators
Posted: 1:04 AM Jun. 09, 2005
Inquirer News Service

THE DEPARTMENT of Finance is proposing crafting a law that will grant uniform tax holidays and other financial incentives to all economic zone locators, a department official said.

Such a move would help resolve a dispute between the Bases Conversion Development Authority (BCDA), which oversees the development of former military camps, and Camp John Hay Development Corp., developer of the Camp John Hay leisure estate and special economic zone in the northern resort city of Baguio, the official said.

The DoF is expected to order immediately the collection of taxes and duties from CJH Development after a Supreme Court ruling withdrew the incentives granted to CJH Development.

"I emphasize that we (DoF) respect the Supreme Court ruling but we are looking at issues of fairness, given that these investors were encouraged to set up there [in economic zones] on the basis of tax exemptions," Finance Undersecretary Emmanuel Bonoan said in an interview with reporters.

The BCDA is running after CJH Development for more than P2.2 billion in unpaid rent, but the developer said it would settle the liability only if the government would live up to its commitment to provide incentives.

CJH Development insists that its agreement with the BCDA provides that it pay a tax of five percent of gross income tax in lieu of all other taxes, and should have duty-free privileges.

The Supreme Court ruling said in effect that the BCDA was wrong in granting fiscal incentives because only locators in the Subic Bay Freeport Zone were entitled to the incentive of paying only five-percent gross income tax in lieu of all other taxes.

To avoid tension between investors and the government, the Department of Finance is proposing that there be a law granting uniform fiscal incentives to all economic zone locators, Bonoan said. He also suggested that the law contain a provision on retroactivity so that the liabilities of CJH Development could be removed.

In a meeting with the Department of Finance, officials of the BCDA and the Philippine Economic Zone Authority (PEZA) acknowledged the importance of harmonizing all economic zone benefits, Bonoan said.

Because Camp John Hay no longer enjoys its own set of incentives, its developer has proposed registering it with the PEZA. With INQ7.net

Tax perks limits cover Clark, Poro Point, too '

2005-06-09T07:23:00.000+08:00

Tax perks limits cover Clark, Poro Point, too
Finance wants new perks law, to woo investors
BY FELIPE F. SALVOSA II, Senior Reporter
Business World Online

To avert capital flight with the closure of businesses and to keep foreign investors interested in the country, the Finance department wants Congress to pass a new law to restore tax perks for locators in former US military bases turned into special economic zones.

Finance Undersecretary Emmanuel P. Bonoan noted that the Supreme Court decision last March limiting such tax perks only to the Subic Freeport Zone in Zambales covered not only Camp John Hay in Baguio, which was the subject of the case, but also the Clark Special Economic Zone in Pampanga as well as the proposed Poro Point tourist zone in La Union.

"All the ones similarly situated as Camp John Hay" are covered by the court decision, which cancelled tax perks granted to businesses in the former Baguio City military camp, Mr. Bonoan said.

Clark alone has more than 400 locators including multinational cargo and freight firm United Parcel Service or UPS, and the manufacturers of Rolls-Royce engines and Yokohama tires.

As per the court order, they may be treated as ordinary taxpayers and may be asked by tax and Customs officials as well as local governments to return all taxes, duties, and fees previously waived.

The court ruling stated that Camp John Hay did not enjoy tax incentives under Republic Act no. 7227 or the Bases Conversion Development Act since that law was intended solely for Subic.

The main economic zone tax privilege is a 5% tax on gross income in lieu of all national and local taxes such as the value-added tax, the documentary stamp tax, real property tax, and import duties.

"There might be some remedial legislation, meaning there might have to be a law granting these tax exemptions and retroacting [them]," Mr. Bonoan said.

He added that the matter would have to be decided by the Finance and Trade departments in light of "equitable considerations."

"I emphasize that we respect the Supreme Court ruling. Given the state of the law, the Supreme Court could have been right. But given that these investors were sold to set up there [economic zones] on the basis of tax exemptions, which might have been misinterpreted in [their] application either by government policy makers or these entities themselves, we’re looking at fairness issues," the Finance official said.

Pending bills in the Senate, such as that of Senator Richard J. Gordon, seek to allow the Bases Conversion Development Authority (BCDA), the Subic Bay Metropolitan Authority, and the Clark Development Corp. to develop other special economic zones in Luzon.

Mr. Bonoan said Mr. Gordon was "thinking along the right lines," but it would be a question of which entity must give the tax privileges.

He said Congress could grant tax privileges outright, otherwise, "the issue of undue delegation of power might crop up."

Finance Undersecretary Nieves L. Osorio, who attended public hearings for the Senate bills, told reporters that Mr. Gordon’s bill could be one of the solutions to the Camp John Hay dispute.

"It would recognize all subsidiaries created by BCDA, including those registered with the Securities and Exchange Commission under the Corporation Code, aside from the chartered subsidiaries or those created by law," she said.

In an earlier interview, Deputy Tax Commissioner Kim J. Henares said an option could be to proclaim former US military facilities as special economic zones under the Philippine Economic Zone Authority, a move that would not require legislation. The President can designate certain areas as economic zones or industrial parks under the PEZA law.

Camp John Hay Development Corp. has asked the government for assurance that it would not be made to pay backtaxes as a result of the court ruling.

NG debt starts to stabilize — BTr

2005-06-08T07:27:00.000+08:00

NG debt starts to stabilize — BTr
By Des Ferriols
The Philippine Star 06/08/2005

The National Government’s (NG) debt has begun to stabilize, the Bureau of Treasury (BTr) said yesterday, reporting net redemption of about P1.5 billion so far this year.

The March NG debt stock has not been released but National Treasurer Omar Cruz told reporters yesterday that while there was no significant net decline in total debt stock, the government has started to redeem more of its domestic debt than it was borrowing.

Cruz expressed relief that the NG is now in a better position to sustain this momentum following the approval of the increase in the value added tax (VAT) rate beginning 2006.

Cruz said the latest available data on the NG debt was still being finalized but said there were indications that the government’s debt accumulation has started to level off.

"But I am not expecting any significant net decline in the NG debt stock," Cruz said. "That will not start to happen until we generate budget surpluses."

According to Cruz, however, the government was expecting to generate budget surplus beginning 2008 as long as the Arroyo administration sticks to its fiscal consolidation program.

The government’s debt burden has been the biggest concern among the country’s investors as well as credit rating agencies who said the Arroyo administration must stabilize its debt before even thinking of debt reduction.

"We are doing that," Cruz said. "We have been redeeming more of our Treasury bills more than we are issuing and we want to continue on this trend."

As of February, the outstanding debt of the NG reached P4.08 trillion after booking its $1.5-billion foreign borrowing completed in January.

As of February, the BTr reported that the total NG debt represented 79 percent of gross domestic product (GDP), consisting almost equally of foreign and domestic borrowing.

As early as February, the BTr has recorded slight declines in the NG foreign debt stock due to the weakening of third currencies that denominate about 30 percent of the country’s total foreign debt.

However, the $1.5-billion dollar-denominated bonds issued in January and booked in February resulted to a net increase in the NG’s total foreign debt stock.

According to the BTr, the net increase in foreign debt was equivalent to P48.76 billion, about 2.5 percent more than the debt stock recorded at the end of January.

Monthly comparative figures from 2004 are not available at the Department of Finance (DOF) which only released the NG debt stock at the end of the year after it completed its restatement based on the financial manual of the International Monetary Fund (IMF).

ANALYSIS: Counting the cost of politics in the VAT law-I

2005-06-08T07:08:00.000+08:00

ANALYSIS: Counting the cost of politics in the VAT law-I
Posted: 1:29 AM Jun. 08, 2005
Paul R. Cooper
Inquirer News Service

(Published on page B4 of the June 8, 2005 issue of the Philippine Daily Inquirer)

LIKE many tax bills, the bicameral process brought some surprises in the value-added tax (VAT) bill. It also carries no explanations why the amendments were made. This will cause technical problems in the implementation process. Not all of the bicameral amendments are readily interpretable.

The bright note from the bicameral process is the removal of the "no pass through" rule for power. For one, the idea was entirely at odds with the objective of a VAT system. More to the point, nobody could probably work out how the rules should be interpreted in practice.

There were, however, some serious negatives added. The effective 3 percent minimum VAT, which threatens to destroy the very foundation of the VAT system, was discussed in yesterday's article. Also, airline and shipping companies have been granted significant concessions (why?), the secretary of finance may increase the rate of VAT to 12 percent (although exactly when is open to question), and a peculiar "final VAT" has been added for the government. How then does the bill as a whole stack up?

Corporate tax hike

It is unfortunate that the corporate tax rate will increase. The measure creates further negative perceptions on the Philippines at a time when it needs to encourage investments. However, this perception might be mitigated if Congress would pass an effective fiscal incentives bill later this year. In any case, the expected revenues might not be realized, either more activities will shift to economic zones (the substitution effect), or companies will modify their debt structures and reduce their taxable income through higher interest deductions.

The measure to subject Philippine Amusement and Gaming Corp. (Pagcor) to tax is curious, arriving in the bill at the last minute from the floor of the Senate. If Congress did not expressly override the charter of Pagcor, although it is necessary to modify the effect of airline franchises and to amend the charter of National Power Corp., will the Pagcor amendment have any real effect? Score another one for the lawyers to argue.

VAT on power, petroleum

To some extent, the resistance to VAT on power and petroleum may be because commentators failed to appreciate what the effect would be. Let's assume the price of electricity before the VAT changes is P8/kwh. Following the change, electricity companies will be able to claim some input tax credits that previously were a cost because of cascading taxes, which we'll assume to be P0.30/kwh. The price to consumers will increase, but should be adjusted to reflect the ability of power companies to recover input taxes. Thus, the price in the example will increase to around P8.50/kwh, which is an increase of less than 10 percent.

Consider the effect on exporters, such as manufacturers of semiconductors, who expressed concerns the VAT would increase the price of electricity to exporters. If the manufacturer is located in a special economic zone or it exports more than 70 percent of production, it is entitled to pay 0 percent VAT on its inputs. Under current law in the illustration, it pays P8/kwh for electricity. After VAT is imposed, the price reduces to around P7.70 because of the 0 percent VAT.

There are benefits for ordinary businesses also. Although the power company will now charge 10 percent, a VAT-registered business may claim a matching input credit. Thus, the real cost of electricity to business will also drop.

From the government perspective, the real benefit from subjecting power and petroleum to VAT may not be the revenues that are squeezed from consumers, but rather the improvement in collection efficiency of the VAT system. VAT collections in 2004 were around P140 billion, representing P1.4 trillion of sales. Leakage is estimated to be as high as P100 billion. Combined, the power and petroleum sectors account for around P600 million of output, more than 40 percent of the current reported VAT base. That's a huge amount of activity to bring out of the hard-to-tax business sector into a larger, and presumably more tax-compliant, sector of the economy.

Admittedly, a large part of the burden from taxing power and petroleum will fall on consumers. One consequence is that consumers may mitigate the effect of the price increase by educing consumption (again raising the issue of how credible the DOF revenue estimates ions are if they assume that tax increases will have no effect on prices and patterns of consumption). Another is that legislators may re-evaluate why the cost of power is so high, as a large part of the debates on power focused on whether power should remain VAT-exempt to give consumers a break. As a tax purist, my own view is that power should be taxed (as well as agricultural products, health, education and other goods and services) so that the efficiencies from an effective VAT system can be achieved. If the price of power is too high, the appropriate policy response is to look at direct subsidies or whether things such as stranded costs are being dealt with. VAT exemption is not the correct response to high-priced power.

Correct policy call

Congress should be congratulated for making the correct policy call when it taxed power in full and at a flat rate.

Input tax for aircraft is a sensible move, until Congress gave away the house. The 5-percent final withholding tax is not the only issue when the lack of transparency will leave taxpayers scratching their heads at what Congress intended. In a positive note, the VAT bill removes the restriction on claiming input tax credits for yachts, aircraft and automobiles used in business. The restriction made no policy sense anyway. If yachts, aircraft or automobiles were acquired for private use, the buyer has no entitlement to input tax. But if acquired for business-yacht chartering or automobile distribution-why shouldn't an input tax credit be allowed.

The quirk is that the rule was probably amended because VAT was slapped on domestic air travel, and it would be inequitable to make airlines pay VAT when they import planes, only to deny an input tax credit because of a few small words in Section 110. The irony is that at the 11th hour, Congress added all kinds of concessions for the air and shipping industry so most companies will never have to pay VAT on their inputs, either because domestic sales are subject to zero VAT or imports are VAT exempt. An airline will never pay VAT on the purchase of aircraft, so it is academic whether Section 110(A)(1)(5) allows an input tax credit for aircraft or not.

Again, there is no clear record about why the industry was treated so favorably. And technicians are left shaking their heads at an amendment that would have made sense, bar the political maneuvering that was required to pass the tax measure.

The author is a tax expert and a director of PricewaterhouseCoopers.

Government accelerates fiscal consolidation program

2005-06-07T07:26:00.001+08:00

Government accelerates fiscal consolidation program
By Des Ferriols
The Philippine Star 06/07/2005

The Arroyo administration has accelerated its fiscal consolidation program by two years, aiming to balance its budget by 2008 instead of 2010.

Finance officials have been urging the Development Budget Coordinating Committee (DBCC) to accelerate the fiscal consolidation schedule and put more aggressive targets for balancing the budget.

National Treasurer Omar Cruz told reporters yesterday that the government’s fiscal targets have been moved up significantly and the schedule for the balanced budget had been moved backwards to 2008 instead of 2010.

"We are reviewing everything in the light of the passage of the new e-VAT (expanded value-added tax) Law," Cruz said.

Budget Secretary Emilia Boncodin said the DBCC has not made its decision but its latest estimates indicated that the 2008 target was "very likely."

The Arroyo administration originally said it can balance the budget by 2006 but the dramatic fiscal slippage in 2002 forced it to move back the schedule by four years to 2010.

Under its original 2010 program, the Arroyo administration projected that its deficit would skyrocket back to P221.2 billion this year as it assumed some P200 billion debt of the National Power Corp. (Napocor).

The downward trajectory would be much slower, going down to P207.3 billion by 2006 and P175.8 billion by 2007. The deficit was then expected to drop to P132.2 billion in 2008 and finally below the P100-billion mark by 2009 when the deficit would reach only P75.6 billion.

By the end of the Arroyo term, however, there would still be a P66.3-billion deficit, all of which would come from Napocor’s P66.3-billion funding requirement.

However, the combined impact of the severe austerity measures and the increase in the tax burden of taxpayers was projected to pare down the 2005 deficit to only P180 million.

By 2006, the Arroyo administration expected the deficit to be whittled down to P89 billion. With more people now paying higher taxes, the Arroyo administration’s budget deficit was projected to go down to as low as P151 billion at the end of 2005 and further down even more drastically to P89 billion in 2006.

Based on the data presented by government officials to Standard & Poors Ratings, it was indicated that the national budget deficit would go down to 2.8 percent of gross domestic product (GDP) this year and to 1.5 percent in 2006.

At this level, the 2005 deficit would be much lower than the P184.5-billion deficit target for the year, equivalent to 3.6 percent of GDP. By 2006, the deficit was originally projected to go down to P161.769 billion, equivalent to about 2.9 percent of GDP.

This early, the Arroyo administration has already reported a P3-billion monthly budget surplus for the first time since 2000. This arose from record tax collection in April after a deficit of P7.8 billion a year earlier.

Moody’s expected to reconsider RP credit rating

2005-06-07T07:26:00.000+08:00

Moody’s expected to reconsider RP credit rating
By Des Ferriols
The Philippine Star 06/07/2005

After the outlook upgrade from Fitch Ratings and the retained double B-minus rating from Standard & Poors, local officials said Moody’s will be under pressure to reconsider its credit rating for the Philippines.

The country’s lowest credit rating was given by Moody’s when it downgraded the Philippines by two notches in February this year from Ba2 to B1.

According to assistant presidential spokesperson Corazon Guidote, Moody’s would be forced to review its rating on the Philippines, especially after considering the amendments in the value added tax (VAT) law that would increase the rate from 10 percent to 12 percent by 2006.

Guidote heads the Investor Relations Office (IRO) in Malacañang and deals directly with credit rating agencies as well as fund managers as the Arroyo administration’s liason.

"I can’t say Moody’s will upgrade its credit rating this year but they will certainly be under pressure to think about it because their rating was really unwarranted," Guidote said.

In its last credit rating action in February, Moody’s noted the recent fiscal reforms undertaken by the Arroyo administration but the credit rating agency said the country’s mounting debts and ever-expanding need for more borrowing have made it even more vulnerable to external shocks and shifting market sentiments.

The downgrade came as a shock to the Arroyo cabinet but did not surprise monetary officials who have been urging the government to frontload its fiscal reforms to ease its development spending.

Moody’s downgrade brought it just two notches away from the Caa level which was considered "poor standing" and close to default.

Unlike Standard & Poors and Fitch Ratings, Moody’s has been tagged as the credit rating agency most reluctant to downgrade the Philippines because of its intimate understanding of Philippine politics.

However, Moody’s expressed concern over the fact that the bulk of the country’s annual budget was going to debt servicing and development spending has been cut to such severe levels as to impair future growth prospects.

Moody’s said the build-up in debt has introduced "heightened vulnerability to shocks despite recent efforts by the government and legislature to enact fiscal reforms."

As a result, Moody’s decided to lower the Philippines’ foreign-currency rating for government bonds to B1 from Ba2, the long-term foreign-currency country ceiling for bonds to B1 from Ba2, the long-term foreign-currency ceiling for bank deposits to B1 from Ba3, and the local-currency rating of the government to B1 from Ba2.

Moody’s credit rating downgrade earlier this year, however, was accompanied by a "stable" outlook, indicating that it was not likely to be reviewing the country’s rating for further credit rating action.

According to Guidote, Moody’s was likely to consider whether it could upgrade the outlook to "positive" and put the Philippines on the path for a possible credit rating upgrade.

A downgrade accompanied by a "stable" outlook indicated that the country did not face immediate dangers of further downgrades. If the downgrade was accompanied by a negative outlook, it would indicate that the country was still in line for yet another downgrade.

Fitch last year put the Philippines on a "negative" outlook but it upgraded this to "stable" following the amendment of the VAT law.

S&P, on the other hand, merely retained its credit rating and its "stable" outlook, saying that it had already factored in the possible increase in the VAT rate when the Philippines was reviewed last year.

The actions of the two large credit rating agency puts Moody’s on a defensive since its credit rating was the lowest among the so-called Big Three and it also carried a "negative" outlook.

Senate starts work on lowering income taxes tomorrow

2005-06-07T07:24:00.000+08:00

Senate starts work on lowering income taxes tomorrow
By Marvin Sy
The Philippine Star 06/07/2005

Lowering income taxes may provide some welcome relief to those burdened by the rising cost of living.

The Senate will start hearings tomorrow on proposals to reduce individual income taxes to provide relief for low-income earners.

Senate ways and means committee chairman Sen. Ralph Recto said that the hearings would focus on three bills proposed by Senators Jinggoy Estrada, Juan Ponce Enrile and himself.

Under the Estrada bill, individuals earning P10,000 or less will be exempted from paying any income taxes.

For those earning over P10,000 but not over P30,000, the tax imposed would be equivalent to five percent of the excess over P10,000.

Other salient points in the Estrada bill include provision that income tax rates be staggered according to the size of the taxpayer’s income:

Over P30,000 but not over P70,000: P1,250 plus 7.5 percent of the excess over P30,000.
Over P70,000 but not over P140,000: P4,250 plus 10 percent of the excess over P70,000.
Over P140,000 but not over P250,000: P11,250 plus 12.5 percent of the excess over P140,000.
Over P250,000 but not over P500,000: P25,000 plus 15 percent of the excess over P250,000.
Over P500,000 but not over P1 million: P62,500 plus 17 percent of the excess over P500,000.
Over P1 million but not over P2 million: P125,000 plus 20 percent of the excess over P1 million.
Over P2 million: P250,000 plus 32 percent of the excess over P2 million.
In the Enrile bill, individuals earning P10,000 or less would be imposed an income tax rate of 2.5 percent.
Over P10,000 but not over P30,000: P250 plus five percent of the excess over P10,000.
Enrile’s tax rates are:
Over P30,000 but not over P70,000: P1,250 plus 7.5 percent of the excess over P30,000.
Over P70,000 but not over P140,000: P4,250 plus 10 percent of the excess over P70,000.
Over P140,000 but not over P250,000: P11,250 plus 12.5 percent of the excess over P140,000.
Over P250,000 but not over P500,000: P25,000 plus 15 percent of the excess over P250,000.
Over P500,000 but not over P1 million: P62,500 plus 17.5 percent of the excess over P500,000.
Over P1 million but not over P2 million: P150,000 plus 20 percent of the excess over P1 million.
Over P2 million but not over P4 million: P350,000 plus 22.5 percent of the excess over P2 million.
Over P4 million but not over P8 million: P800,000 plus 27.5 percent of the excess over P4 million.
Over P8 million but not over P10 million: P1.8 million plus 27.5 percent of the excess over P8 million.
Over P10 million but not over P12 million: P2.35 million plus 30 percent of the excess over P10 million.
Over P12 million: P2.95 million plus 32 percent of the excess over P12 million.

Under the Recto bill, individuals earning less than P10,000 must pay income tax of 3.5 percent. The other proposed tax rates are as follows:

Over P10,000 but not over P30,000: P350 plus seven percent of the excess over P10,000.
Over P30,000 but not over P70,000: P1,750 plus 10.5 percent of the excess over P30,000.
Over P70,000 but not over P140,000: P5,950 plus 14 percent of the excess over P70,000.
Over P140,000 but not over P250,000: P15,750 plus 17.5 percent of the excess over P140,000.
Over P250,000 but not over P500,000: P35,000 plus 30 percent of the excess over P250,000.
Over P500,000: P110,000 plus 32 percent of the excess over P500,000.

"Lowering income tax rates will benefit at least 13.5 million, or 86 percent, of Filipino families who have annual salaries below P250,000," Recto said.

"Presently, income taxes paid by an individual with a net income of P250,000 are almost a fifth of that individual’s net income. That leaves not much to spend for basic needs," Recto added.

He said a significant number of wage earners are unable to benefit from the wage hikes mandated by the wage boards, saying it would be better to lower the income tax rates.

ANALYSIS: VAT, you say? What VAT is that?

2005-06-07T07:21:00.000+08:00

ANALYSIS: VAT, you say? What VAT is that?
Posted: 2:36 AM Jun. 07, 2005
Paul R. Cooper
Inquirer News Service

MONDAY'S article examined some of the key principles underpinning a value-added tax (VAT) system. To reduce price distortions, an ideal VAT should have a single rate and limited exemptions.

VAT exemptions are generally not exemptions in the sense people normally think of them. For example, consumers are already implicitly paying VAT on power and petroleum every time they buy goods and services from businesses that used power and petroleum as inputs to their business.

How should the VAT bill be rated? My own assessment is that the bill is reasonably balanced and acceptable. The problem is that the exception-an effective 3-percent minimum VAT-is huge, and threatens to destroy the very foundation of the VAT system. To make matters more problematic, the drafting of the provision is vague.

Policy concerns on the cap

When the idea of putting a cap was originally introduced on the floor of the Senate, the idea was to address to some extent the under-reporting of output VAT and over-reporting of input VAT by non-compliant taxpayers. The original suggestion was a cap of 90 percent, or effectively a minimum VAT of one percent. At that level, the rule should not impact adversely on compliant taxpayers, but would result in non-compliant taxpayers having to account for closer to their true tax liability.

As a general policy consideration, one should question why our legislators are penalizing compliant taxpayers when the fundamental issue is the apparent inability of the Bureau of Internal Revenue (BIR) to implement tax law effectively.

With a cap of 90 percent, the measure might still have been defensible as a rough proxy for VAT. However, somewhere in the bicameral process, the rule has become even more punitive with a cap of 70 percent. As with most amendments introduced at the bicameral stage, there is no public indication about what lawmakers were thinking when they put the travesty in place.

How far were legislators influenced by the percentage tax of three percent that is imposed on persons that do not register for VAT?

One of the arguments in Senate debates for taxing the power and petroleum sectors was that if it was good enough for mom-and-pop stores to have to account for the VAT, it was good enough for the biggest companies in the country to do the same. A similar argument here is that if small businesses have to pay a minimum three-percent tax, why should larger VAT-registered persons get away with paying less?

The problem with this thinking is threefold:

• The percentage tax applies to small businesses in the hard-to-tax sector and a few believe the BIR collects close to what it should from this. Nor should we be overly concerned if this is the case -- the revenues are small, and the BIR's efforts would be a lot better focused on larger taxpayers where more significant revenues will be at issue.

• VAT-registered persons incur compliance costs. The three percent tax might be better conceived as a slightly more expensive option to allow taxpayers to opt out of the VAT, rather than a punitive rule for small businesses. (If the percentage tax is considered unduly punitive, why is it not just repealed?)

• Ironically, one of the new measures in the Senate bill was to allow taxpayers with turnovers below the registration threshold to register voluntarily for VAT if they believe the three percent tax imposition to be excessive. Without the minimum VAT, smaller taxpayers might have been encouraged to enter the more formalized VAT sector.

Perhaps the Department of Finance (DoF) also played a role. The DoF's estimate that increasing the VAT rate from 10 percent to 12 percent would yield P50 billion a year has never appeared that sound based on 2004 collections of around P140 billion. Increasing the VAT rate by 20 percent should at best raise P28 billion, before one makes downward adjustments for income effects (see Monday's article) and potentially higher evasion. If estimates on the revenue yield from a three percent minimum VAT are also questionable, this may be because the estimations fail, among other possibilities, to:

• subtract from the revenue estimations the amount of VAT already being paid by businesses, thus failing to recognize that the revenue yield from a three percent minimum VAT is far more than three times the revenue yield from a one percent tax;

• isolate sales subject to zero percent VAT; or

• recognize that small taxpayers are more likely to be non-compliant than large taxpayers, so that an estimation based on date for large taxpayers (easier to obtain) cannot merely be extrapolated to the entire VAT base. Have legislators proceeded because the estimates have lulled them into a false sense of security about the likely effect of the amendments?

Potential consequences of the cap

The minimum VAT will distort the way taxpayers conduct business. A three percent minimum VAT is more likely to impact on sellers of goods than on sellers of services, as their proportion of taxable inputs are lower (there is no VAT paid when using labor, but there is VAT on the purchase of goods). Consequently, there will be a bias toward consuming services over goods. Businesses may have an incentive to obtain goods from the informal (and potentially tax-evading) sector as there will be no input tax paid for the purchase -- in other words, the bill may actively encourage less tax-compliant behavior. Business structures may change; expect buy-sell distributors to convert into commission agents, as this reduces the risk that they will need to pay more than should be paid under a VAT system to cover the three percent minimum VAT.

Tax professionals will also have a field day. One only needs to read the amended text of Section 110(B) of the Tax Code to see this: 110(B) Excess Output or Input Tax. If at the end of any taxable quarter the output tax exceeds the input tax, the excess shall be paid by the VAT-registered person. If the input tax exceeds the output tax, the excess shall be carried over to the succeeding quarter or quarters provided that: the input tax inclusive of input VAT carried over from the previous quarter that may be credited in every quarter shall not exceed 70 percent of the output VAT, and that any input tax attributable to zero-rated sales by a VAT-registered person may at his option be refunded or credited against other internal revenue taxes, subject to the provisions of Section 112.

The second proviso will be read to qualify (override) the first, so that the input tax attributable to zero-rated sales will be fully creditable, despite the cap of 70 percent. Further, on a strict reading, the cap only applies to input tax carried over from the previous "quarter" (not quarters), implying that an excess input tax from the September 2005 quarter could be fully applied in the March 2006 quarter. In effect, the provision as drafted achieves a one-period one-off deferral of input VAT.

Now answer the following question honestly. Do you expect the BIR to agree with this interpretation? Fun times may be ahead.

Solution to problem exists

Despite the problems with the minimum VAT, a presidential veto was never an option. Who knows what might happen if the VAT bill were forced through Congress again? An alternative solution would be available: Pass the VAT bill as it stands but introduce a priority bill to tidy up the drafting in section 110(B) of the Code, before the bill takes effect in July 1, 2005.

Although a cap on input VAT is not consistent with a best-practice VAT system, the idea has merit in a Philippine context, where evasion appears to be widespread. The level of cap needs to be realistic so as not to encourage compliant taxpayers to opt out of the tax base. The cap in the Senate bill (90 percent) may be acceptable, although 95 percent would be better. In setting a level, one should not lose sight of what should be an overriding objective of the government-the BIR improve its administration, in which case a cap would be neither appropriate nor necessary.

At the end of the day, it would be tragic if the final nail in the inbound investment coffin were not the corporate tax rate increase, but a small provision buried in the bill that has not been made visible in any of the comments on bill developments made to the press during the legislative process.

(To be continued)

(The author is a tax expert and a director of PricewaterhouseCoopers.)

Gov't gets P2.5B in GOCC, GFI dividends

2005-06-07T07:20:00.000+08:00

Gov't gets P2.5B in GOCC, GFI dividends
Posted: 2:34 AM Jun. 07, 2005
Michelle V. Remo
Inquirer News Service

THE NATIONAL government has collected P2.5 billion worth of dividends from government-owned or -controlled corporations (GOCCs) and government financial institutions (GFIs) this year, boosting efforts to raise more revenues and ease its budget deficit and debt problems, a Department of Finance official said.

The P2.5 billion, remitted as of the first week of June, were from the 2004 income of GOCCs and kept the finance department on track to meeting its GOCC revenue collection target of P4.0 billion this year, Finance Undersecretary Nieves Osorio said.

State corporations are required to remit 50 percent of their income to the national government, said Osorio, the department undersecretary in charge of monitoring the finances of GOCCs.

Development Bank of the Philippines (DBP) accounted for the biggest remittance at P1.135 billion, P585 million of which represented advanced remittance for the second half of the year, she said.

Other GOCCs and GFIs and their dividend remittances:

• Philippine Ports Authority -- P500 million

• Philippine National Oil Co. -- P306 million

• Land Bank of the Philippines -- P300 million

• Philippine Economic Zone Authority -- P94 million

• Philippine Deposit Insurance Corp. -- P51 million

• Philippine Leisure and Retirement Authority -- P41 million

• Metropolitan Waterworks and Sewerage System -- P41 million

• Cebu Ports Authority -- P34 million.

The dividend revenue target was set at P4.0 billion, compared with the P4.9 billion collected last year from 2003 incomes, partly because of a request of some GOCCs with negative retained earnings to be exempted from the dividend requirement this year.

Such an exemption is allowed under the law, Osorio said.

The national government collected P763 million in guarantee fees from GOCCs and GFIs in the January-April period this year, Osorio also said.

She said the government aimed to collect P3.0 billion in guarantee fees this year. With INQ7.net

IMF review to start this week

2005-06-07T07:09:00.000+08:00

IMF review to start this week
BY KAREN L. LEMA, Senior Reporter
Business World Online

An International Monetary Fund (IMF) team will visit the country this week for a regular post program monitoring (PPM) review of the country’s economic and fiscal performance.

In particular, the PPM mission led by Masahiko Takeda will look into the details of the recently enacted value-added tax (VAT) law, IMF representative to the Philippines Vikram Haksar said.

The two-week PPM review will start on June 9 and end on June 22.

Mr. Haksar said the IMF welcomes the enactment of the changes to the VAT system because it is "a significant step towards fiscal consolidation."

The IMF has been advising the government to adopt a more aggressive budget deficit reduction program by wiping out the deficit ahead of a 2010 target.

The enactment of the VAT law as well as measures imposing higher excise taxes on cigarette and tobacco products and establishing a reward and punishment mechanism for revenue officials have increased the possibility of achieving a balanced budget before the target, government officials said.

Economic managers expect the deficit to go down to as low as P151 billion at the end of 2005, lower than the P180-billion target, and further down to only P89 billion in 2006.

This will be due to the combined effects of revenue measures, savings from the streamlining of the bureaucracy and administrative measures being implemented to improve tax collection.

The PPM is similar to a regular IMF program except for the absence of a loan component. Member countries that exit from funding programs normally go through the PPM first, partly to attain the so-called seal of good housekeeping which it can use to obtain lower borrowing costs from foreign lenders.

The Philippines graduated from the last IMF funding program in 2001. The current PPM arrangement involves frequent consultations between government and IMF officials, focusing on the country’s fiscal position and balance of payments.

The IMF, which is an organization of 184 countries, conducts a review on the Philippines twice a year under the PPM arrangement but can no longer impose policies.

No Free Lunch: Agriculture: reversing the decline

2005-06-06T07:59:00.000+08:00

No Free Lunch: Agriculture: reversing the decline
Posted: 7:30 PM Jun. 05, 2005
Cielito Habito
Inquirer News Service

Published on Page B4 of the June 6, 2005 issue of the Philippine Daily Inquirer

MANY still think of the Philippines as an agricultural economy; strictly speaking, it is not. Agriculture, fishery and forestry now directly account for just a fifth (20 percent) of the economy's aggregate domestic output and incomes (GDP). Since the 1960s, the direct share of agriculture in the GDP had fallen below one-third, and by 1981, the sector's share was only 23 percent.

In terms of employment, the sector's role is more substantial, accounting for nearly two-fifths (i.e. 37 percent) of all jobs in the economy. Still, the services sector accounts for close to half of both output and jobs in the economy.

However, if one considers agro-processing and agricultural inputs manufacturing and trading (i.e. agribusiness sectors) along with basic agricultural production, about 40 percent of GDP and two-thirds of jobs in the economy arise from agriculture. Thus, dominance of the services sector notwithstanding, the fact remains that the welfare of the vast majority of Filipinos hinges on the health of our farms and fisheries.

Dramatic reversal
Unfortunately, agriculture also displays the most erratic growth among the economy's major sectors, as growth rates tend to fluctuate widely from quarter to quarter. We see this in the most recent growth performance of the sector. While the sector's full-year real GDP growth performance was well within the target for 2004 and exceeded the preceding year's performance, the most recent quarters have again seen dramatic slowdowns from previous quarters, due mostly to unfavorable weather conditions.

Up until the 1970s, the Philippines' agricultural performance, in terms of both output (agricultural gross value added or GVA) and, was superior to most of its neighbors and other Asian countries. Average annual growth of our agricultural output was 4.9 percent in that decade, well above the 2.9-percent average for 10 countries in the region. Those were the heydays of Philippine agriculture, when we were still being regarded as mentors to our neighbors' emerging agricultural scientists, who flocked to UP Los Baños and other leading agricultural schools in the country.

The picture changed dramatically in the succeeding decades. By the 1980s and 1990s, the country found itself at or near the tail-end of the same 10 countries. Agricultural output growth had slowed down dramatically, to an annual average of only 1 percent in the 1980s, against the improved 3.3 percent average annual growth of our neighbors. While our average agricultural growth performance improved to 1.8 percent in the 1990s, this was still below the regional average of 2.3 percent.

Labor, land productivity
All this traces to deterioration in our agriculture sector's productivity, which can be measured in three ways: labor productivity, land productivity and total factor productivity.

Labor productivity is simply the value of output per agricultural worker. Here we are not doing so badly relative to our neighbors. The Philippines' labor productivity, at about P19,754 per worker in 2003, remains ahead those of large, populous countries such as China and India, and of our neighboring countries Vietnam, Indonesia, and even Thailand. The bad news is that our labor productivity grew only by 0.7 percent annually in the 1990s, while that of our neighbors grew by more than twice as fast.

Land productivity can best be seen in the data on yields. The yield performance of our top five major crops, namely rice, corn, coconut, sugarcane and banana, followed a checkered history since the 1960s. Rice and corn yields grew fastest in the 1960s, slowed down in the 1970s, picked up again in the 1980s, and in the case of rice, has again recently slowed down. Coconut has seen a growth in yields since the latter 1980s, while sugarcane yields have been on a general decline. Banana yields grew rapidly in the 1970s, declined in the 1980s, and has rebounded in more recent years. International comparisons suggest that we are an average performer in terms of land productivity. Yield growth in developing Asia averaged 3.3 percent a year, with the highest growth experienced by China, Indonesia, Pakistan and Vietnam. The lowest growth performance occurred in Nepal; the Philippines is somewhat in the middle.

Technology and efficiency
Where we are glaringly behind is in total factor productivity (TFP) of agriculture, which measures overall efficiency and technological change. Our average growth in TFP of only 0.4 percent a year since 1981 is way below that of most of our neighbors, that include Vietnam's 1 percent and China's 3.6 percent. TFP growth accounts for less than 10 percent of our agriculture sector's growth, as against one-third for Thailand, and more than 40 percent for Indonesia. This suggests that technological change has been slow on Philippine farms compared to our neighbors.

Two things appear to have happened leading to this sad state of affairs. First, we have long ceased to become mentors to the agriculturists of the region; now we have much to learn from the same agricultural scientists from our neighbors that we originally trained in Los Baños, Muñoz and elsewhere. Second, our ability to get our farmers to use improved farm technologies has gotten worse through the years. Much of these trace back to our government's money problems. But just as important are our age-old failures in governance and policy implementation.

There is certainly a great deal of homework for us to do if we are to feed our people adequately in the years ahead.

S&P urges gov't to reduce debts

2005-06-06T07:56:00.000+08:00

S&P urges gov't to reduce debts
Posted: 10:39 PM Jun. 05, 2005
Doris C. Dumlao
Inquirer News Service

Published on Page B4 of the June 6, 2005 issue of the Philippine Daily Inquirer

GLOBAL credit-rating firm Standard & Poor's said the Philippines would need to reverse the uptrend in its debt stock in order to reduce its vulnerabilities and obtain a more favorable credit rating.

In a recent press briefing, S&P analysts Agost Benard and Philippe Sach said the country was a "significant outlier" among similarly rated countries with its ratio of debts to assets of 70 percent compared to the median of 40 percent.

"The Philippines, if we compare it to many of its BB peers, has a higher debt burden and has a larger portion of revenues dedicated to debt servicing in the form of interest payments," Sach said.

"For those reasons, it is immediately susceptible to a host of factors which are beyond control of the government, such as interest rate dynamics and exchange rate dynamics and we're moving into an environment of less benign interest rates, global monetary tightening and slower global growth," he said.

But Sach said S&P's stable outlook on the Philippines indicated that a downgrade was not imminent and that the rating firm was on a wait-and-see attitude on what would come out of recent fiscal reforms.

"It's not so much we're talking about debt reduction. We're talking more about debt stabilization at this point. With the [fiscal] deficits, debt has been trending upwards and it's increasingly been diverging from much of its BB peers," he said.

Benard said all the measures which promise significant reduction in debt would have to be well administered in the next couple of months.

"First of all, the VAT [value-added tax] rate will have to be raised in January. It will have to be implemented and after that we'll see how the additional revenues will be divided and if we see a concerted effort more toward debt reduction, certainly that would be a positive factor," Benard said.