Tuesday, 6 July 2010

Bumps ahead to test gov’t

Analysts stress need to address fiscal situation
BusinessWorld
http://www.bworld.com.ph/main/content.php?id=13750

THE AQUINO ADMINISTRATION appears to have hit the ground running but fiscal headaches -- some of the new president’s making -- could test its resolve to move the country forward.

Fiscal consolidation and a correction of the downturn-induced slippage, analysts said in two reports, are necessary if President Benigno C. Aquino III is to avoid disappointing both his voters and investors.

This would require more than just administrative improvements, economists Margarita D. Gonzales and Romeo L. Bernardo of research firm GlobalSource Partners said in a July 3 report titled "A Good Start."

They noted that while Mr. Aquino had put together a "commendable" economic team, he had also hampered fiscal managers by populist promises such as not adopting new taxes.

"Although there are well-known low-lying fruit including the eradication of wholesale oil smuggling, estimated revenue gains from this exercise would hardly be enough to bring back the country’s tax effort ratio to around 15%, which is the new government’s announced goal," they said.

The ratio was at 13.1% last year.

Tax administration improvements, the economists claimed, added just 0.6% and 0.5% to gross domestic product (GDP), respectively, during the terms of Mr. Aquino’s mother, the late Corazon C. Aquino, and her successor, Fidel V. Ramos.

Global experience, meanwhile, has shown that achieving a revenue collection improvement equal to of 1% of GDP "would already be a feat."

The economists also noted that Mr. Aquino’s campaign slogan of "Kung walang corrupt, walang mahirap (without corruption, nobody will be poor)" had created expectations that would be difficult to meet.

Poverty eradication, they said, requires "broader solutions encompassing a complete set of reforms". Failure to deliver on inaugural speech promises of emergency employment, better education, universal health insurance and housing -- which means added spending -- could set the president up for "quick disappointment of his voters."

Mr. Aquino, they said, should make use of his current political capital -- he won over 40% of the vote in the May 10 elections -- to push reforms as he has "little time to waste, especially as financial market sentiment is becoming less forgiving of growing fiscal deficits and debt ratios with the world eventually exiting recession and reversing from a fiscal stimulus mode."

GlobalSource highlighted two measures -- excise tax adjustments and the rationalization of fiscal incentives -- as among those needed, adding that hopefully it would take "not that long" for economic managers to prod Mr. Aquino.

"We are confident though that the new government will live within its means in the meantime, as fiscal authorities will likely ensure that spending will be controlled," the economists said.

But they warned that the 2010 deficit could top P300 billion, rising to as high as 3.8% of GDP and exceeding the 3.6% target, given uncertain privatization prospects and the P145.2-billion first half cap having been substantially overshot by P17 billion in May.

GlobalSource also said that the central bank was expected to "stall exit plans" as inflation remained moderate. The report noted monetary authorities’ expectations that remittances would "normalize" to 5-6% growth in the near future, among other external indicators, and said analysts saw the domestic stock market remaining bullish and could "still approach highs reached in 2007."

"This confidence, especially of local investors, is bolstered by studies showing how equities typically jump 12 months after an election, with this coming year unlikely to be an exception in view of the smooth turnover of leadership and the new president’s strong mandate," Global Source said.

Meanwhile, in a research note dated June 29, the Institute of International Finance (IIF) said the Aquino administration’ "first order of business would be to correct the fiscal slippage."

But the IIF -- a global association of financial institutions -- said the government should be able to do so before investors lose their confidence, noting state debt of less than 60% of GDP and an economy that has recovered from last year’s downturn.

"Fiscal adjustment will complement President Aquino’s anti-corruption campaign, so his first budget due out in the third quarter should reveal much about the new government’s intentions," it said in the report, titled "Philippines: New President’s Fiscal Policy Headache."

It noted that the global crisis had interrupted the previous government’s gains in controlling the deficit which, excluding privatization proceeds, was kept below 2% of GDP between 2006 and 2008. Crisis-induced revenue weakness and pump-priming expenditures pushed this to 3.9% last year and even higher to 6.9% as of the first quarter of 2010.

The revenue picture, however, has since improved, the IIF said, as it cited gains by the tax and customs bureaus, among others.

Limited market reaction has supported the tack that had been adopted, it said, adding that large reserves -- at a record $41 billion in May -- and a balance of payments surplus "help assuage near-term market concerns."

The economy, the IIF said, could rebound to 6.2% growth this year from 2009’s 1.1%, moderating to 5.2% in 2011.

"All this suggests that President Aquino is likely to take the window of opportunity provided by favorable economic trends and market support to correct the fiscal slippage and set a positive tone for his administration," it said.

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