MANILA,  August 18, 2004
By Stuart Grudgings - The Philippines could soon have new faces in charge of its shaky finances and the crucial sale of a state-owned power firm as President Arroyo selects a team to help her reform the limping economy.

But the Cabinet reshuffle may not be enough to quell divisions in Congress that threaten to bog down Arroyo’s central plan of raising the country’s puny tax take, which analysts see shaping up as her biggest challenge.

After winning the May elections, President Arroyo pledged to wipe out the $3.5- billion annual budget deficit by the end of her new term in 2010. Her success depends heavily on persuading Congress, which passed a record low number of bills last term, to vote for a series of new taxes, some of them controversial.

The economic ministers will play a key role in persuading sceptical politicians to vote for more taxes, but the President’s selections may also reflect the need to pay off election debts.

"The thing that I’m going to watch most carefully is whether the decisions are done for those people who have competence for the job or are pay-offs for political favors granted during the campaign or earlier," said Peter Wallace, who heads his own business consultancy in Manila.

Mrs. Arroyo has hinted she might make some Cabinet announcements as early as Wednesday. Pundits in the Philippine media have speculated that Finance Secretary Juanita Amatong will step down to be replaced by Energy Secretary Vincent Perez. Other sources said Amatong would stay until the end of the year.

Whoever gets the job faces the tough task of charming international markets into continuing to fund the country’s debt habit while persuading politicians to accept tax hikes.

Unless some of the revenue-raising bills are passed, economists warn that Manila may suffer another downgrade on its $60-billion debt by international ratings agencies this year.

"The overall fiscal situation is not sustainable," said Tom Crouch, Philippine country economist at the Asian Development Bank.

He noted that the rising cost of financing the debt had squeezed the amount of money available for development projects to about 19 percent of total spending, making it difficult to alleviate the poverty that afflicts 40 percent of the population.

‘Tax Terrorists’

There are few guesses on who would replace Perez, inheriting the unenviable task of dealing with record high oil prices and the privatization of debt-saddled National Power Corp., crucial to paring the deficit and preventing looming power shortages.

The privatization has been delayed by investor concerns over revenue prospects and the firm’s P500 billion debt burden, which the government has said it will take over to help complete the sale by next year.

The task of patching up relations with Washington after Manila’s early withdrawal of its Iraq force last month may fall to Alberto Romulo, Arroyo’s executive secretary and close confidant, according to media reports.

Former police chief Leandro Mendoza, who helped President Arroyo fend off plots to unseat her after she rose to the presidency in 2001, is favored for the defense ministry, continuing reforms to the restive military while dealing with communist and Muslim rebels.

The President may find the most troublesome rebels are in Congress, despite the majorities she won in both houses.

In the House of Representatives, some senior lawmakers want the President to put priority on shifting to a parliamentary system, a long-debated change aimed at creating stronger party loyalty and less divisive politics.

"It is a tug of war. Unfortunately, the economic question, particularly tax reform bills, are part of the bargaining," said political analyst Ramon Casiple.

The 23-member Senate looks set to give an even more hostile reception to some of the tax steps, which government officials say are crucial to raising one of Asia’s lowest tax takes.

Joker Arroyo, an administration senator, called on the president to restrain the "tax terrorists" in her Cabinet. Like other senators, he argues that the government should plug holes in its leaky collection system before thinking up new taxes.

Reported by: Sol Jose Vanzi

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