Wednesday, 4 February 2009

Philippines reaps benefits of VAT

Market Files
Lito U. Gagni
http://www.businessmirror.com.ph/index.php?option=com_content&view=article&id=5574:expectations-on-the-economy&catid=28:opinion&Itemid=64

The sobering realization on the US economy hit home when, upon the inauguration of President Obama, the markets went into a tailspin referred to as “Black Wednesday.” And it has see-sawed since, up one day and in a precipitous drop the next day, indicating that personal charisma alone does not move markets. What is important is decisiveness and political will—these are what investors look for, not the rock-star appeal. The market rout after the euphoria on the precedent-setting win of Obama was revealing.

Revealing, in a sense, that banks are hard-nosed creatures that would not let credit lines loose simply because the new president happens to have tremendous rock-star appeal. This is especially so when they got hit by big losses on wrong bets. For the banks to make credit rolling once again, which is what is needed in the US economy, is for them to be assured of getting paid. “Once burned, twice shy,” a market truism says. That is why experienced leaders know that when it comes to dealing with the economy, decisiveness and political will are the better tools.

Economic necessities require rolling up one’s sleeves and stepping into the muddy and murky waters of ambivalent public opinion. This is what the Philippines can lay claim to, for the government’s decision to implement the expanded value-added tax (E-VAT) system has steered the country away from the huge government bailouts that the US Federal Reserve and Treasury have implemented for the US financial sector. The Philippines did not have to issue more debt notes to shepherd the economy to a soft landing.

There was much opposition to the E-VAT when it was brought up. Many politicians even made political capital out of the public’s aversion to paying additional taxes. Many political personalities won in the 2007 elections by whipping up resentment against the revenue-generating measure. Some even projected that the economy could collapse. But that, perhaps, is the meaning of political will. It means risking one’s popularity to do what is right for the country. This is what decisiveness and political will mean.

And now, because of the much-derided tax measure, the revenues from the E-VAT form the backbone of the planned P300-billion economic-resiliency plan the National Economic and Development Authority announced recently. Had the President buckled under the threat of character assassination, the country would not have had the financial wherewithal with which to fund such a plan. It is ironic that the much-maligned E-VAT would actually provide some relief to the poorer sector during these times of economic difficulties spurred by the debacles of Wall Street.

Under the plan, those E-VAT-generated resources will help create and save jobs and assist overseas Filipino workers and others who may be adversely affected by the contraction of the economies of their host countries. In a sense, it is ironic that while the E-VAT was termed antipoor, it is now bruited as the best tool to help the poor. The economic-resilience fund calls for a combined private-public sector push for an aggressive infrastructure and social-services program that will create jobs and trigger a chain of positive effects on other sectors.

This infrastructure buildup, now also set to be implemented by Obama, is obviously a way of preparing for the inevitable influx of tourists and businesses when a global economic rebound takes place. It takes the slack brought about by the big losses on Wall Street that now have reached Philippine shores. With it, the country could be better prepared for the next surge in business activity, thanks to the decisiveness and political will of the government. At a critical juncture in the country’s economic history, its leaders did not blink.

Funds from the E-VAT, we understand, were also responsible for the government’s ability to expand spending during the first 11 months of 2008 by 11 percent—expenditures necessary to ensure steady economic growth and to protect the sectors most affected by higher oil prices. And we believe that those resources—and the political will that characterized their implementation—are the bases for the relative optimism in the forecast of our economic performance for 2009. Pragmatism dictates that the growth target be adjusted to more reasonable levels: a GDP growth of between 3.7 and 4.7 percent for 2009.

Economists from the University of Asia and the Pacific foresee a Philippine GDP growth of between 3.8 and 4.5 percent. Several international financial institutions see growth at between 3 percent and 4 percent. It ironic then that the E-VAT-generated resources actually have much to do with Fitch’s rating of the country’s economy as “reasonably healthy” and Credit Suisse’s announcement that the country remains an attractive investment destination. The E-VAT provided welcome news amid the global economic meltdown.

And to think that before the E-VAT was implemented, there were doomsday scenarios painted on the economic horizon should the measure be implemented. This is part of our political culture and probably cannot be avoided. Some political personalities perhaps still believe that painting a pessimistic economic landscape would help them win the polls. Or at least help them gain rock-star appeal. That’s okay. But it is well to remember that it is decisiveness and political will—not rock-star appeal—that account for the rather relatively positive prospects for the country’s economy in 2009.

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