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By Arnold S. Tenorio
, Assistant Business Editor
Second of three parts
IN September Socioeconomic Planning Secretary
Romulo Neri went out on a limb for the passage of the sin-tax
indexation bill.
In what became the strongest pitch a member of
President Arroyo’s economic team made for the bill, the planning
chief said its passage would send the clear message to foreign
creditors of government’s resolve to untie its fiscal bind.
At the time Neri made the remark, the National
Economic and Development Authority, which he heads as
director-general, was rushing the draft of the President’s new
Medium-Term Philippine Development Plan, an ambitious blueprint
geared toward bringing down unemployment to single-digit rates and
reducing the number of poor Filipinos in half.
Three months later, and barely a month after its
launch, the new economic plan is unraveling.
With less than a month to go before Congress
ends its session this year, the sin-tax indexation bill has been
reduced to a shadow of its original version, thanks to intense
lobbying by the tobacco industry.
The planning chief has since recoiled, leaving
other economic managers to defend the emerging “compromise”
measure.
With government failing Neri’s “litmus
test,” the planning chief was taken to task for his first—and
perhaps last—medium-term plan.
The government unfortunately has painted itself
into a corner.
Already faced with limited resources, the
government however raised the stakes much higher when it churned out
a plan, which funding requirements depended on what Neri called a
“strong-reform scenario.”
His strong pitch for the sin-tax indexation bill
therefore should come as no surprise.
After all, the government’s new development
plan rests on an equally ambitious program to wipe out the budget
deficit in six years.
The fiscal moorings of the MTPDP can be
explained by the fact that the deficit, as a share of the
country’s economic output, or gross domestic product, peaked at a
record 5.2 percent during the President’s second year in office.
The fiscal gap has narrowed to 4.6 percent of
GDP last year, but the government wants to bridge this gap come
2010.
Reducing financial vulnerability
Under the MTPDP, the government aims to reduce
its financial vulnerability both in the short term and over the long
haul. It wants to reduce the public- sector deficit (liabilities of
the national government and government-owned and -controlled
corporations) from 6.7 percent of GDP to just 1 percent, and bring
down the national government debt and public-sector debt (national
government and GOCC debts) from 79.4 percent and 136 percent of GDP
this year to 51.2 percent and 90 percent, respectively, in six
years.
The blueprint eyes a combination of new tax
measures, tighter enforcement of existing tax rules, cuts in
wasteful expenditure, and a reduction in the financial losses of
state-run National Power Corp. to achieve its goals.
The plan also mentions a number of “innovative
sources of wealth creation,” to include the sale of Napocor,
operating the Mount Diwalwal gold mine, developing additional oil
and gas wells, massive land reclamation projects, nationwide
reforestation, and establishing Hong Kong-type of enclaves to lure
in foreign investors.
The measures are supposed to raise the
country’s revenue effort (defined as the share of revenues to GDP)
to 18 percent in six years, with tax effort (share of taxes to GDP)
alone rising to 17.2 percent.
Furthermore, the government’s capital outlay
(its infrastructure spending bill) is seen rising from 2.4 percent
of GDP this year to 4.2 percent by 2010.
Beyond dealing with its immediate funding
concerns, the government also wants to deepen the country’s
financial system “to mobilize domestic savings and finance
investments as economic growth accelerates.”
In doing so, the government need not bloat its
financial liabilities through costly bailouts of failing financial
institutions.
To achieve these goals, the MTPDP envisions a
number of reforms geared toward broadening the domestic capital
market and creating alternative investment opportunities.
All of these proposals however would be for
naught if the government doesn’t take the first step of correcting
its fiscal imbalance, experts said.
‘No capital market if macros are wrong’ 7
“How can we have a capital market to begin
with if the macros are wrong,” said Romeo Bernardo, a former
finance undersecretary who took part in consultations NEDA held for
the MTPDP chapter on the financial sector. “If uncertainty is
there, then there’s no predictability in interest rates,
inflation, the exchange rate. No one will hold long-term papers.”
“We might as well kiss goodbye our vision of
providing the Filipinos access to cheaper sources of long-term
credit,” he added.
Experts agree that any improvement in the lives
of ordinary Filipinos requires decisive action to resolve the
government’s perennial funding shortfall.
While its neighbors have seen revenues rise with
improving economic fortunes, the Philippines’ recovery hasn’t
been accompanied by a return of tax collections to their pre-Asian
crisis levels.
Hafiz Pasha, United Nations assistant
secretary-general and director of the UN Development Program’s
regional bureau for Asia and the Pacific, said the Philippines’
tax effort fell by as much as 5 percent in less than five years.
“[That] is really quite steep.”
Poor revenue collection has forced the
government to borrow in order to keep the bureaucracy running, not
to mention deliver adequate public services.
Increased borrowing in turn has inflated the
public debt and eaten into the national budget.
Solita Monsod, a University of the Philippines
professor and former planning chief in the Aquino administration,
said the budget deficit accounted for P42 of every P100 in debts the
government incurred.
Now, for every P100 of this year’s budget, the
government has to spend about a third, or P32 for its debts—and
this covers interest payments alone.
Of the remaining P69, some P43 would be used to
pay personnel salaries and office bills among other operating
expenses while P13 is set aside for local government units and GOCCs.
This means only P10, or a third of the amount
allotted for interest payments, is left for building new
farm-to-market roads, classrooms, health centers and other public
infrastructure.
A more disturbing development is the continued
rise in the budgetary share of debt servicing at the expense of
capital outlay, courtesy of a decree issued by President Marcos
automatically appropriating interest payments.
The share of debt servicing to this year’s
national budget represents a significant increase from last year’s
P26 out of every P100 of the spending bill.
The share of capital outlay over the past four
years, meanwhile, has been mostly on the decline, according to
Monsod in a presentation before businessmen in October.
She cited last year alone when spending for this
item dropped by nearly 14 percent from the year before.
The debt trap
Experts warn that failure to reverse this rising
share of debt would further erode investor confidence, which in turn
could make it increasingly difficult for the Philippines to raise
enough dollars to pay for its imports and repay its foreign debt.
If global interest rates suddenly rise, the
country would find it difficult to repay its debt, leading to a
“sharp cutback” in foreign loans, according to Monsod.
Scarce dollar inflows abetted by capital flight
would in turn pull down the peso’s value, and raise the cost of
imports.
Considering the high import content of
electronics, which account for 60 percent of Philippine exports,
exports may suffer, thus further depleting the country of precious
dollars to repay its debt.
This debt trap could put a break on economic
growth, and push more Filipinos into the ranks of the jobless, who
at present already account for at least 1 in every 10 Filipinos
seeking work.
Neri earlier admitted the government is spending
about P90 billion more in interest payments on its
dollar-denominated debt papers alone as a result of an earlier
credit-rating downgrade by Moody’s Investors Service, one of three
international rating firms of consequence to the Philippines.
This is because Philippine debt papers, also
called ROP (Republic of the Philippines) bonds, carry an interest
rate that is 4.5 percentage points higher than similar US government
obligations, which is the benchmark for all debt instruments.
Each percentage point increment translates to
some P20 billion in additional interest expenses, based on
government estimates.
Despite Indonesia’s lower credit rating, it is
paying less interest on its obligations, as its debt papers carry an
interest rate that is only 3.5 percentage points higher than
comparable US treasury notes.
This is likely due to the “negative” outlook
that Moody’s attached to its rating downgrade of the Philippines.
With a “Ba2” rating, Philippine debt papers
are already considered of substandard quality, as the issuer’s
repayment capacity is doubtful.
The “negative” outlook worsens matter
because this means Moody’s is likely to further lower the
issuer’s rating in the next six months to a year.
Credible fiscal program
Putting in place a credible fiscal program,
experts said, could turn things around for the Philippines in so far
as investor and creditor confidence is concerned.
Sethaput Suthiwart-Narueput, senior economist at
the World Bank, said an uptick in revenues as a result of a credible
fiscal program would boost creditor confidence and help bring down
the cost of government’s debt servicing.
Savings from lower debt payments would in turn
free up more resources to bankroll government’s priority projects.
“The impact would be immediate,” the bank
economist said. “[Creditor confidence] could bring down interest
costs by several hundred basis points, which would translate into
savings.”
As it is, the government’s existing program
falls short of the international financial community’s
expectations.
Nearly everyone from the International Monetary
Fund to credit-rating agencies has called on government to
front-load its fiscal reform measures in order to boost creditor
confidence.
Front-loading entails adopting more aggressive
deficit-reduction targets in the early part of President Arroyo’s
fresh six-year term.
Suthiwart-Narueput said front-loading is deemed
more crucial because the world economy is faced with a cyclical
downturn next year, thus giving the Philippines a short breathing
spell.
“Now is the right time for reform,” he said,
adding the higher tax take would boost investor confidence and help
trigger the return of direct investments in a bigger way.
Indeed, this is why Neri had been banking on the
passage of the sin-tax indexation bill. He said the passage of the
measure would improve the creditor-rating outlook on the
Philippines, if not reduce the interest rate on ROP bonds by one
percentage point for a P20-billion savings in debt servicing.
“If we include the side effects of domestic
interest payments, maybe we can save up to P30 billion in terms of
lower interest cost,” he said.
Despite the urgency of fiscal reform, the
planning chief’s prodding fell on deaf ears in Congress, which has
yet to pass any one of the eight priority revenue measures included
in the MTPDP.
This is ironic because Neri rose to the position
of NEDA director-general on the strong backing by Speaker Jose de
Venecia.
(To be continued)
Part 1 |Part
3
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