Wed, 09 Mar 2005


Arroyo's plan to lower deficit helped by rating cuts

Bloomberg, Manila

Philippine President Gloria Arroyo, who proposed raising taxes to help reduce a record 186 billion peso (US$$3.4 billion) budget deficit, is getting help from Moody's Investors Service and Standard & Poor's.

The two credit rating companies cited the deficit as a reason they reduced their Philippine ratings in the last two months, raising the country's annual borrowing costs by $73 million. Ten days after S&P's action, the House of Representatives voted to increase the value-added tax to 12 percent from 10 percent.

Doctors, lawyers and oil importers also will pay the tax for the first time.

The cost of financing the shortfall has left Arroyo's government less money for roads, bridges and schools in the Philippines, where a third of the population of 86 million lives on less than 60 U.S. cents a day.

Arroyo, a 58-year-old former professor of economics, in July declared a "fiscal crisis" and asked lawmakers to approve eight tax proposals aimed at raising 80 billion pesos a year.

Congress this year approved 25 billion pesos of new levies on cigarettes and alcohol and adopted incentives for tax collectors to beat revenue targets. The measures weren't enough to stop S&P from lowering its rating one level to BB-, three rungs below investment grade, on Jan. 17, citing rising debt and weak revenue collection.

Jesli Lapus, chairman of the Ways and Means Committee in the house, called the rating reduction "very influential" in spurring the value-added tax legislation, which next goes to the Senate. "There was really a sense of urgency," he said in an interview in Manila on Feb. 18.

The Philippines on Jan. 27 sold $1.5 billion of 25-year debt in its biggest single overseas bond offering. The government plans to sell another $2 billion of debt by the third quarter.

The bonds due February 2030 were sold at 98.13 to yield 9.7 percent, about 5.05 percentage points over similar-maturity U.S. Treasuries, the Department of Finance said on Jan. 27.

The price rose to 103.125 at 10:30 a.m. in Manila from 102.75 on Monday, according to HSBC Treasury & Capital Markets in Hong Kong. The yield fell to 9.177 percent from 9.215 percent. The yield gap, or spread, narrowed to 4.87 percentage points from 4.91 points.

"The timing for the issuance was good," said Jun Mendoza, who helps manage about $1.3 billion at Banco de Oro, a Manila- based lender.

"The government had just passed two tax-reform measures, and investors were looking forward to the passage of more." He said he bought some of the bonds.

The government almost scrapped the global bond sale after the ratings cut by S&P. "I had sleepless nights," Finance Undersecretary Eric Recto said in an interview in Manila on Feb. 14.

On Feb. 16, Moody's lowered the nation's rating two steps to B1, four levels below investment grade, citing "the large buildup in government and external debt."

The resulting increase in annual borrowing costs, estimated at up to 4 billion pesos by National Treasurer Norma Lasala, "may turn the clock back on efforts to reduce the deficit," said Tenev of the IFC.

Government debt has risen by about 75 percent to 3.8 trillion pesos since Arroyo took office in January 2001. This year, interest payments will come to 295 billion pesos, more than double the amount in 2001, and consume about a third of the budget.