MANILA,  August 9, 2004
A huge bundle of IOUs weighs on President Arroyo’s slight shoulders as she attempts to lift the anemic Philippine economy with the help of a fresh electoral mandate, officials and analysts say.

Rampant tax evasion — and Manila’s runaway borrowings to cover the gap — discourages investment and impairs the government’s ability to create jobs to help out half of the 84-million population that lives on two dollars a day or less, they said.

The International Monetary Fund warned last month the country’s economy was at a "crucial juncture" and Arroyo needed to bring both the budget deficit and debt "to more sustainable levels."

The national government has debts outstanding of $60.71 billion, or 77 percent of gross domestic product (GDP). Manila-based Asian Development Bank estimates 27.4 percent of the national budget and 42.1 percent of tax revenues now go to debt service.

Arroyo, who defeated the country’s most popular movie star Fernando Poe Jr. in the May 10 election, agrees she must "put our economic house back in working order before it finds itself beyond hope of repair and doomed to share the fate of failed nations."

She has pledged to address the chronic deficits, expected to reach $3.54 billion or 4.2 percent of GDP this year.

To reduce debt, she asked Congress in an annual address last month to pass eight new tax measures, warning Filipinos that "ignoring (the deficits) can kill the economy" and send "the wrong signal that we don’t understand our fiscal predicament and will not help ourselves.

"This will drive away investments, exacerbate the deficit and hurt job growth."

With GDP growth of 5.0 percent in 2003, the jobless rate rose to 13.7 percent in April, even though the Philippines had already exported about seven million of its working-age citizens abroad.

These overseas workers remit home nearly eight billion dollars a year, the equivalent of 7.5 percent of GDP.

Senate President Franklin Drilon, a key ally of Mrs. Arroyo, agrees that "unless we address it (the deficit), we’ll have a fiscal crisis."

However, he wants the government to first collect taxes more efficiently.

"There is tremendous leakage in the system," said Manila-based business consultant Peter Wallace of Wallace Business Forum, who points to rampant evasion both among corporate and individual taxpayers.

While government figures show there were 6.75 million employees, 3.3 million privately owned motor vehicles and three million credit card-holders in the country, only 2.09 million people filed their tax returns in 2002, he said.

He estimates some $625 million in income taxes went uncollected that year.

Bear, Stearns and Co. analyst John Stuermer agreed the passage of new taxes "might be difficult" and could alienate Arroyo’s allies.

Nevertheless, he estimates Manila would need to borrow $3.64 billion this year to finance both the deficit as well as to keep the loss-making state utility National Power Corp. up and running.

The Philippines has raised about $1.8 billion from capital markets this year, making it the second largest sovereign issuer in Asia behind Japan.

Standard and Poor’s has since cut the Philippines long-term local currency rating by a notch to BBB-minus.

This "implies an increased risk of crowding out private sector investment — which has been struggling to regain momentum since the 1997 financial crisis — with the consequent impairment of future growth prospects," said S and P analyst Agost Benard. — AFP

Reported by: Sol Jose Vanzi

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