JUNE 10, 2009
(STAR) By Des Ferriols - With the global economy not even out of recession, Bangko Sentral ng Pilipinas (BSP) Governor Amando Tetangco warned against the disruptive impact of political events that could affect the country’s economic policies.

Tetangco noted yesterday that markets have been increasingly spooked over plans to amend the Constitution leading to a possible change in the political system that critics said was an attempt to keep President Arroyo in power.

Tetangco downplayed the political developments but admitted the market could be very sensitive to how the political situation would unfold in the coming months.

“Situations like this usually affect market perception but this can be said of any event,” he said.

Tetangco said it was natural for the market to be edgy and watchful of how these political developments would unfold and impact on the country’s economic policies, particularly the reforms that were already in place and needed to be completed.

“If the market will look at this, whatever is happening or is about to happen would be assessed based on its impact on the economic policies and therefore the performance of the economy,” Tetangco said.

The unfolding events apparently frightened the stock market and posted losses for two days in a row as various groups threatened to organize massive protest actions to oppose amendments of the country’s 22-year-old Charter.

Analysts said the developing conflict between the Arroyo administration and the opposition made investors nervous and they ultimately decided to cash in on gains rather than be stuck in a brewing political maelstrom.

The benchmark 30-company stock market index dropped 29.47 points or 1.175 percent while the all-shares index fell 1.3 percent.

For the moment, analysts said investors are using the political tension as an excuse to cash in.

Eventually, analysts said, these tensions could develop into real disruption, especially given the country’s history with street protests turning violent.

Before being sidetracked by the constituent assembly bill, Congress was in the middle of discussions on key economic reforms that the country’s creditors and investors have been waiting for.

Primary among these economic legislative initiatives are the bill to rationalize the country’s fiscal incentives for export industries, the indexation of the excise taxes on tobacco and alcohol to the inflation rate and the amendment of the BSP charter that would complement the amendment of the charter of the Philippine Deposit Insurance Corp.

The Arroyo administration has to deal also with the inexorable decline in government revenues due to the failure of the Bureau of Internal Revenue (BIR) to generate the taxes it was supposed to collect.

This year, the decline in revenues was expected to widen the government’s budget gap to at least 2.5 percent of the gross domestic product – a level that was widely viewed by creditors and investors as acceptable but only if it was the result of an increase in public spending on critical infrastructure.

As of April, the Department of Finance (DOF) reported that the fiscal gap was expanding, but spending has not been able to catch up with the programmed expenditures for the period even as tax revenues failed to meet projections.

The DOF has said it may increase its latest fiscal shortfall goal of P199.2 billion, or 2.5 percent of GDP.

“We would possibly downscale our growth targets, but it’s still positive,” Socio-Economic Planning Secretary Ralph Recto said.

Recto said the country still expects the economy to expand this year albeit at a slower pace than the government’s target of 3.1 to 4.1 percent, while the budget deficit could be wider than estimated.

When asked if the budget deficit goal this year may be raised to 3 percent of GDP or higher, Recto said: “It’s possible, that’s possible. That should be considered in our discussion tomorrow.”

“Assuming that to be a worst-case scenario, then you have to plan your financing strategy just in case.”

Recto declined to give details on the new estimates up for approval.

Bond yields have risen since last week on investors’ worries that Manila may borrow more from the debt market to fund a larger budget deficit.

On Tuesday, yields in the secondary debt market climbed an average of 10 basis points and the Treasury rejected all bids at a regular auction of 5-year T-bonds after banks demanded a premium for the paper.

With debt yields on an uptrend, the Treasury said last week it has other funding options, including possibly another foreign debt sale and more concessional loans from multilateral lending agencies such as the World Bank.

In March, Recto said the Philippines’ budget deficit could balloon to as much as P257 billion this year if tax collections fall short of target and Manila fails to sell assets to boost its revenues.

The economy shrank a seasonally adjusted 2.3 percent in the first quarter from the previous three-month period, the lowest in two decades, prompting the central bank to deliver last month its fifth rate cut in a row since December.

Chief News Editor: Sol Jose Vanzi

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