Political theatre seen in Arroyo comment

Political theatre seen in Arroyo comment

Stuart Grudgings, Reuters, Manila

President Gloria Macapagal Arroyo's declaration that the Philippines was in a fiscal crisis drove markets sharply lower, but analysts said on Tuesday the remark was probably a ploy to win support for new taxes.

Economic ministers scrambled to play down the alarm sounded by Arroyo on Monday, stressing that the country's finances were not technically in crisis because it was having no difficulty funding its US$3.5 billion annual budget deficit.

"We are not in a fiscal crisis," said trade and industry minister Cesar Purisima. "The president used the term rhetorically and not technically."

Analysts said Arroyo's statement might have been a shock tactic aimed at piling pressure on congress to pass a series of new tax steps that are the centrepiece of her plans to wipe out the deficit within the six-year term she won in May elections.

"I think it's really tainted with political colour," said Astro del Castillo, managing director of First Grade Holdings.

"Before the elections, she was saying that the economy was doing well -- revenues were getting better, foreign direct investments are flowing in and so forth."

The government only just missed its deficit target for the first half of the year and foreign investors have snapped up its debt, which offers yields around 4.2 percentage points higher than U.S. Treasuries, with little apparent fear of a default.

But economists have warned that the deficit, which adds to a government debt pile of $60 billion, could lead to a fiscal crisis within a few years and say the government needs to take steps quickly to raise one of Asia's lowest tax takes.

They also warn that international ratings agencies could downgrade the Philippines, whose sovereign debt is already two notches below investment grade, if tax reforms are not passed.

Markets seemed to take Arroyo's comment seriously.

Manila stocks tumbled more than 2 percent to a one-month low on Tuesday and the peso eased 0.3 percent against the dollar to 55.935, its lowest since early August.

Philippine sovereign bonds held steady, but the coupon rate on a new offering of four-year bonds jumped to 11.75 percent from 11 percent as local banks demanded a higher premium in the wake of Arroyo's statement.

National Treasurer Mina Figueroa said banks had asked her for clarification.

"We are not yet in a fiscal crisis," she told reporters. "If those (tax) measures are not passed, we will get into a fiscal crisis."

Arroyo, a U.S-trained economist, wants congress to approve eight measures aimed at reversing a slide in tax revenue to around 12 percent of gross domestic product from around 17 percent in 1997.

Her officials have said the steps would raise an extra 80 billion pesos ($1.4 billion) in revenues a year while creating annual savings of 20 billion.

Without a higher tax take, her policy goals such as putting a computer in every school and creating a million jobs a year to ease chronic poverty could prove unfeasible as they would risk raising the country's already heavy dependence on debt.

Despite a majority of lawmakers in both houses of congress, however, her plans are unlikely to get a smooth ride.

Opposition to tax rises by vested interests have stymied previous attempts at reform and even some of Arroyo's allies have said she should first patch up the country's leaky collection system before imposing new taxes.