MANILA, November 12, 2004 (STAR) DEMAND AND SUPPLY By Boo Chanco - Okay, boys and girls… hope you haven’t popped the champagne bottles open and donned colorful party hats. This week, Moody’s Investors Service, one of the major international ratings agencies, warned that the Philippines is very close to a potentially costly downgrade of its credit standing because of its deteriorating debt position. In simple terms, a downgrade means we must pay more in interest because creditors think our worsening fiscal condition increases the risk of our inability to pay our debt.

In a statement, Moody’s said there were concerns "over the sustainability of the government’s fiscal and debt positions" and, accordingly, its sovereign ratings faced the possibility of a downgrade. Ha! What did I say? Ate Glo may be trying to impress the madlang masa with her premature declaration of "no more worries, the crisis is over." But there is no fooling the folks who read the numbers and understand our situation.

The continued deterioration in the fiscal and debt positions, Moody’s pointed out, places added pressure on the external balance of payments and the ability of authorities to maintain a prudent level of official foreign exchange reserves. Sabi ko nga ba, eh. Boy! Are those guys unimpressed.

Ate Glo and her Palace chorus tried to convince us that with the passage of the watered-down House version of the sin tax measure, we are all set to enjoy Christmas. But Moody’s correctly observed that "attempts by the government to pass into legislation urgently needed revenue measures are proving to be politically difficult despite President Gloria Macapagal Arroyo’s electoral victory earlier this year and the ruling coalition’s majority position in Congress."

That view is not surprising. I wrote here some weeks ago that this was the sentiment expressed by the folks our economic managers presented to in a recent international roadshow. I was told that when Trade Secretary Cesar Purisima made a big thing about the big electoral mandate of Ate Glo and the way her party won control of both houses of Congress, he was met by an icy response. How come, he was asked, some of her partymates are blocking a quick passage of the needed reform measures?

The brutal fact is, we need to raise state revenues by at least P80 billion annually but only one measure is likely to be passed this year, heavily diluted at that. Of course Moody’s noted there were "limited prospects for a fundamental turnaround in the revenue performance," adding that it sees a "far less benign interest rate environment" ahead, which in turn will add to the cost of borrowing.

As we pointed out, a ratings downgrade will raise the Philippines’ borrowing costs and make the underlying problems worse and will definitely not encourage investor confidence. A downgrade will affect not just government borrowings but all borrowings of local companies abroad. That would put pressure on interest rates and on the exchange rate and the cost of doing business here. PLDT and Globe, both blue chips, are now being reviewed by the same credit rating agencies for a downgrade due to country risk.

BSP Governor Rafael Buenaventura said as much. "They will assess whether we are able to achieve our milestones... If they don’t see these milestones, of course, we will be downgraded. This will put pressure on borrowings and on the foreign exchange rate," Buenaventura told reporters.

And what are these milestones? Cora Guidote, head of the government’s Investor Relations Office, said ratings agencies want to see at least three of several tax measures passed into law, including imposing higher taxes on liquor and tobacco and amnesty to delinquent taxpayers. The agencies also want to see National Power Corp.’s electricity rates raised some more to turn the cash-strapped electricity firm viable enough before it is privatized.

Former Finance Usec Romy Bernardo in a recent article estimated "a one-notch credit downgrade is expected to raise government’s financing cost by about 25 basis points, which translates into additional interest expense of P400 million on a $3-billion refinancing requirement for 2005 of the National Government and Napocor alone (i.e., not counting additional costs of new deficit financing and borrowings of the private sector)." The construction of so many more schoolhouses will have to be postponed to cover government’s increased borrowing costs.

Worse, we are likely to be hit with a double whammy. The US Fed last Wednesday increased interest rates and that is another pressure that will increase our debt servicing costs. According to Albay Rep. Joey Salceda in his recent paper on the fiscal crisis, "every one percent rise in global interest rates translates to P19 billion in additional cost to service the government’s US$35-billion foreign debt. The country has a total US$57-billion foreign debt."

Ate Glo is funny. She belatedly and reactively recognized the country is facing a crisis and in the process, increased the spreads on Philippine bonds. The lack of investor confidence lies in the failure of our officials to do something that the market considers as sufficiently addressing the fiscal problem. The bad news is, she may actually honestly believe the crisis is over. And we thought we elected an economist who uses her brain, not a movie star who just wants to look good.

View from New York

A Pinoy expat sent me this e-mail in reaction to recent events here.

I see your point in your Nov. 8 article where you called the government an adhocracy. One wonders whether the government is really serious about helping the country move forward or just putting on a show, hoping that well-educated Filipinos and foreign investors will not see the problems that lie behind the curtains. The president’s retraction of her "fiscal crisis" statement felt like an insult to the public’s intelligence, so was the so-called "medium term development plan" that lacked, of all things, a section on how the plan will be financed.

Now the government is once again shooting the Filipino people in the foot and threw away thousands of prospective jobs with the recent DOJ Opinion No. 29 labeling airfreight companies as public utilities. Besides the immediate possibility of big cargo forwarders closing their operations in the country, the ruling will have far-reaching consequences such as reinforcing prospective investors‚ belief that the Philippines‚ investment climate is unpredictable. It also undermines the government’s own ICT development program because many labor-intensive services industries such as call centers might be classified as "public utilities" (i.e., "Telecommunications").

After the controversies associated with PIATCO and the Manila Hotel sale, didn’t the government learn its lesson and have a plan to iron-out legalities that could potentially get in the way of foreign investments? A simple inter-agency committee between the DTI and the DOJ would have done the job. Even if this opinion were to be retracted, the damage has probably already been done. I find it hypocritical that the government launches catchy one-line initiatives such as ICT, only to create policies that undermine its own efforts.

Yes, it seems that the Philippine government is indeed an adhocracy that operates by knee-jerk decisions and creative PR. Filipinos might well be resigned to seeking better job opportunities abroad.


Atty. Sonny Pulgar sent this one.

A man returning home a day early from a business trip got into a taxi at the airport. It was after midnight. While en route to his home, he asked the cabby if he would be a witness. The man suspected his wife was having an affair and he intended to catch her in the act. For P1,000, the cabby agreed.

Quietly arriving at the house, the husband and cabby tiptoed into the bedroom. The husband switched on the lights, yanked the blanket back and there was his wife in bed with another man. The husband put a gun to the naked man’s head.

The wife shouted, "Don’t do it! This man has been very generous! I lied when I told you I inherited money. He paid for the Expedition I bought for you. He paid for our new Tagaytay vacation house. He paid for our European tour. He paid for our Alabang country club membership, and he even pays the monthly dues!"

Shaking his head from side-to-side the husband slowly lowered the gun.

He looked over at the cab driver and said, "What would you do?"

The cabby said, "I’d cover him up with that blanket before he catches a cold."

Boo Chanco’s e-mail address is

Reported by: Sol Jose Vanzi

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