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.