Tax freeze worsens Arroyo's woes

Tax freeze worsens Arroyo's woes

John O'Callaghan, Reuters/Manila

Legal threats to President Gloria Macapagal Arroyo's economic reforms hit the Philippine peso and stocks on Monday as allegations of election cheating and corruption appeared to be eroding some of her support base.

Manila's main stock market index closed 4.2 percent lower and the peso fell nearly half a percent against the dollar after a Supreme Court ruling late on Friday froze an expanded sales tax that is seen as key to cutting debt and wooing investors.

"It's hard to catch a falling knife," said Astro del Castillo, managing director at First Grade Holdings in Manila.

"The supposed medicine that will cure our fiscal illness was somehow withdrawn."

Standard & Poor's said there was no immediate impact on its ratings on the Philippines, now three notches below investment grade, but that the delay in much-needed fiscal consolidation was adding to heightened perceptions of risk.

"The incident again highlights the difficulty of implementing fundamental reforms in the Philippines," S&P said, adding the country's stable outlook may come under scrutiny.

The opposition, which is calling for Arroyo to quit over the allegations, has challenged the constitutionality of part of the tax package but there was speculation the president may have leaned on the court to help defuse anger over rising prices.

All of the Supreme Court justices appointed by Arroyo voted to freeze the broader tax, which had been in effect for just 18 hours on Friday. The new law would have raised prices by adding sales tax to previously exempt items such as power and fuel.

The government, which denied having any influence on the ruling, said it lodged a "very urgent motion" with the court on Monday seeking to have the freeze lifted.

Analysts said a final decision could take months from the start of hearings on July 26 and that the damage had been done.

Traders said the peso was saved from a heavier fall on Monday by sustained central bank dollar-buying around 56.10.

The Philippine Daily Inquirer reported on Monday that Arroyo was losing some support from the middle class and the Catholic Church -- two of the key constituencies behind her rise from vice president when Joseph Estrada was ousted as leader in 2001.

The newspaper said administrators of De La Salle University, an upscale Catholic college with 100,000 students nationwide, had joined calls for Arroyo to step down.

"Resignation would prevent the person from dragging the whole Philippines down, and we feel it has reached that point," university president Armin Luistro was quoted as saying.