MANILA, June 13, 2005
 (STAR) BIZLINKS By Rey Gamboa  - Stories about "jueteng" and the "wire-tapped GMA conversation" are given so much media space and footage that lurking unresolved economic issues are left in the backstage. As a result, investors remain wary and jittery about the country’s economic health.

For instance, it is not surprising that Standard & Poor’s and Moody’s continue to view the Philippines with caution even if the current administration finally passed the value-added tax law. Only Fitch was more optimistic in raising the sovereign credit rating of the country from negative to stable, but sadly, this does little for our current below-grade financial standing.

Again, the Philippines is being compared with Argentina. Thus, when a senior Moody’s analyst commented that we continue to be in a shape worse than our touted Latin American twin before it defaulted on its debts in 2001, it’s time to re-examine just where we really stand.

In February, Moody’s Investors Service – regarded as the kinder debt-watcher compared to S&P – slashed the country’s debt rating two notches to B1 after seeing how the fiscal and debt situation was quickly worsening.

B1 is a rating four notches below investment grade and a level below S&P’s rating of BB for the Philippines. This rating is the lowest for the country since 1993 when Moody’s started examining the Philippines creditworthiness.

It’s Still The Budget Deficit And Debts

The government’s colossal budget deficit, at almost four percent of the country’s gross domestic product last year, continues to be the biggest concern despite recent tentative signs of increasing revenue take-up. Argentina’s deficit in 2001 was only at 3.2 percent of its total domestic production.

Similarly, Philippine debts are now about 85 percent of GDP. This ratio is almost double of Argentina’s 54 percent of GDP level shortly before the Latin American economy defaulted on $95 billion of maturing bonds, and again on $3 billion owed to the International Monetary Fund a year later. The public sector debt of the Philippines stands at P4.1 trillion ($75 billion) which is about 525 percent of the 2004 revenue.

Lower Dollar Inflow Too

Adding to the swollen deficit and runaway debt is the declining current account surplus, which the Bangko Sentral ng Pilipinas said could drop to $1.2 billion this year against slightly over $2 billion in 2004. The central bank is expecting import growth to continue outpacing that of exports this year, thus the forecast of a lower external payments surplus.

If the external payments position swings into a deficit, the country’s financial problems could significantly worsen. Presently, the fact that we still have more than enough dollar inflows to pay for goods and services we import from other countries is keeping us on drier grounds than Argentina.

Two things help our dollar position: one is the proceeds of our mammoth borrowings; and second is the remittances of overseas Filipinos.

Wayward Debt Control

The Philippines is still the largest debt issuer in Asia outside of Japan. The country already sold $2.25 billion of bonds this year – $1.5 billion in January and $750 million this month. The government will soon raise another $850 million to complete its foreign financing requirement for the year.

This is expected to boost the country’s foreign exchange reserves to $17 billion in the coming months, although such level is still considered one of the lowest in the region.

If our meager gross international reserves are artificially buoyed by borrowings, at least we can be on more solid footing with the dollar remittances from overseas Filipino workers, which is estimated to hit more than $8 billion by the end of the year.

Unfortunately, even if our dollar reserves improve, this does not translate to lower interest rates on borrowings as investors continued to demand a higher yield on Philippines borrowings, higher in fact, according to analysts, compared to similarly rated economies like Brazil.

What credit agencies are trying to tell us is that even compared to other countries with a B1 rating, the Philippines is still not faring well with what really matters: debt control and fiscal management.

Shaky Hold

So where does the solution to our fiscal quagmire really lie?

Any business unit that is perennially losing is bound to fold up anytime. Without profits, there is no way that even a household could decently survive.

Such is the scenario, on a bigger scale, that awaits the country if the government will not be able arrest its revenue decline soon. And this can only be achieved if revenue-collecting agencies clean up their ranks and continue improving their operations.

The revenue package of increased VAT corporate tax takes, projected to yield between P56 and P61 billion, is just one of the eight proposals that the government made last year to raise at least P80 billion in additional revenue each year. Other revenue measures may have to be enacted to fill the gap.

There is concern, however, that unless the tax collecting agencies broaden their tax collection base, only those that are presently paying taxes will be burdened by the increase in tax rates. Those who have not paid in the past will continue to do so.

It is, therefore, important that the weekly filing of tax evasion cases against prominent personalities that have instilled some fear among taxpayers should be pursued vigorously. At the same time, the campaign against unscrupulous revenue agents must be resuscitated.

It is a long way to go to cure our fiscal ills. The national leadership will have to make a commitment to undertake a no let-up program to generate more revenue and, at the same time, assuring the public that the funds will not line the pockets of the corrupt and the favored ones.

While many doubt that the ongoing "jueteng" and "wire-tapped conversation" drama will undo GMA, a continued deepening of the economic malaise we are in may just pull the rug from under our feet.

‘Breaking Barriers’ with N. Tabata, Toyota Motor, Phils. CEO

With the favorable Court of Appeal ruling on the importation of used vehicles, is Toyota’s position being affected by the growing market for imported used vehicles? What is Toyota doing about it? How would you rate the competition coming from Korean automotive companies? Are they going to be strong competitors? What is the extent of Toyota’s involvement in local parts and components manufacture? What is Toyota’s wish list of government policies that should be put in place to accelerate the development of the industry in the Philippines?

Join us in "BREAKING BARRIERS" on Wednesday, 15th June 2005, IBC-TV13 (11 p.m.) and gain insights into the views of Nobuharu Tabata, president and chief executive officer, Toyota Motor, Philippines on the above questions and on various other issues related to the automotive industry both locally and within the region. Watch it.

Reported by: Sol Jose Vanzi

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