MANILA,  August 24, 2004
By Marichu Villanueva - President Arroyo acknowledged for the first time yesterday that the Philippines is in a "fiscal crisis" and urged the public to prepare for "pain," as economists warned of debt default within three years.

"We are already in the midst of a fiscal crisis and we have to face it squarely — wielding our courage, resourcefulness and solidarity as a nation and as a people," Mrs. Arroyo said in a statement issued by Malacañang.

Budget Secretary Emilia Boncodin said Mrs. Arroyo had ordered aides to "evaluate the proposal to declare a state of fiscal crisis."

Such a declaration would allow the President to withhold, for a limited period, the release to local government units of a portion of the 30 percent of taxes collected by the government that is allotted to them by law.

The statement was issued after a group of economists at the University of the Philippines warned that the country faced an Argentinean-style economic crisis in two to three years unless a widening public sector deficit and ballooning debt problem were brought under control.

"I appreciate the concern and suggestions being put forth by well-meaning quarters to resolve the crisis and I take this as a sign of sincere concern that must be translated into deeper public awareness and action," the statement said.

"Average Filipinos are already taking the brunt of sacrifices but we have to gather round again as one national community to take stock of the future. The pain is imminent but it will be shared fairly and without putting one over the other," the President said.

She added that the government is already working with Congress on "strategies to get the budget in place."

The government hopes to contain this year’s national budget deficit at P197.8 billion, with Mrs. Arroyo promising to wipe it out before her term ends on 2010. The deficit in the first half of the year reached P80.1 billion, exceeding a government-set ceiling of P79.6 billion.

The President endorsed to Congress last month a package of tax measures to address the deficit.

The Arroyo administration has been repeatedly denying the country was in a state of fiscal crisis following statements made early this year by former finance secretary Jose Isidro Camacho right after he left the Department of Finance.

According to Boncodin, however, the government’s economic managers had no discussion on the issue of declaring a fiscal crisis, adding that even if the President "mentioned" this crisis, it need not have an impact on the budget or on government spending.

Boncodin said the President’s only directive to her economic managers was to "identify measures" to alleviate the government’s fiscal problems, particularly since it has to absorb some of the National Power Corp.’s P560 billion debt.

The term "fiscal crisis," however, has specific effects on the budget if officially declared. Under the Local Government Code, declaring an "unmanageable public sector deficit" would allow the government to annual budget allocations received by the local government.

Boncodin admitted as much, saying that the Arroyo administration has already imposed deep cuts on every single expenditure item except interest payments and the Internal Revenue Allocation (IRA) received by local governments as spending money.

"The only items in the budget that are still increasing are the IRA and debt service since these are automatically allocated under the appropriations act," she said.

This year, a total of P141 billion was allocated for the IRA and this has been increased by P10 billion next year. By declaring a fiscal crisis, the Arroyo administration can change the proposed 2005 budget to cut down on local government spending and force them to mobilize their own resources instead of depending on national budget allocations.

The Local Government Code gives local government units the authority to impose local taxes and even go to the debt market on their own to raise funds for their requirements.

Boncodin told reporters that the President’s statement need not cause panic. Mrs. Arroyo’s economic managers, however, still called an emergency meeting yesterday.

The President’s acknowledgment of the fiscal crisis was immediately transmitted to creditors, credit rating agencies and the International Monetary Fund late yesterday.

Though the Investor Relations Office at the Bangko Sentral ng Pilipinas could not provide official answers to inquiries, IRO managing director Cora Guidote said the declaration of a fiscal crisis has very specific pre-conditions under the definition used by the IMF and credit rating agencies.

"There are three basic and very specific conditions that have to be met before the IMF and credit rating agencies say that anyone has a fiscal crisis," she said.

Guidote cited that the country has to be in default, lose access to the capital market, and has to be clearly unable to finance its budget deficit.

"We are nowhere near any of these criteria," she said. "We are definitely not in default, we still have access to the capital market and since we still have that access, we can still finance our deficit."

Boncodin said while the government had serious fiscal problems, it has not burgeoned into a full-scale fiscal crisis.

"What we have is a public sector management problem," she said.

Camacho said in a telephone interview that regardless of what the President intended to convey by admitting to a fiscal crisis, her statement should be taken as a "call to arms."

"Even when I said this the first time, what I intended was for people to keep their eye on the ball and realize that everyone should focus on the goal," he said.

Camacho admitted that "looking back I probably should have been more open about this during my tenure as secretary. Even then there was a need to both raise revenue collection and the tax rate."

Risking default

Mrs. Arroyo’s aides earlier rejected Philippine comparisons with Argentina’s debt woes, saying Manila was still paying down its obligations. Buenos Aires defaulted on its public debt in January 2002 amid violent street riots.

The UP economists warned a likely uptick in global interest rates will make it much costlier to repay the government’s overseas debt, raising the risk of default within the next two or three years.

"This (threat of non-payment) would result in a sharp cutback in subsequent credit, particularly from foreign lenders, and precipitate a crisis such as that Argentina or Turkey experienced," said the group, who include ex-cabinet members Benjamin Diokno, Felipe Medalla, Solita Monsod and Gerardo Sicat.

Manila last fell into a debt hole in 1983-1984, when it defaulted on sovereign obligations and was cast off from the international financial markets.

"While the economy is not yet on the brink at this time, it can probably afford at most three years to avert such a crisis — with possibly a year at most to convince financial markets it is doing something to reverse the situation," the paper said.

Government debt has more than doubled since the mid-1997 Asian crisis to P3.36 trillion, or 130 percent of the gross domestic product (GDP), the paper said. Half of it is in local currency.

Defaulting on even the domestic portion would cause "major difficulties and bankruptcies for the domestic banking system" and "ruin millions of depositors," which would lead to "severe economic contraction, causing thousands of bankruptcies and throwing millions onto the streets," the paper said.

The professors said these scenarios "are being fended off only" by the billions of dollars in annual remittances of the Philippines’ seven million-strong overseas work force.

But this could be reversed by "any large external shock, such as a sustained increase in world oil prices, or a sharp fall-off in workers’ remittances, or, ironically, even rapid growth that caused the import bill to rise."

They said Manila should at the bare minimum raise P150.6 billion more a year through fresh taxes and an eight percent increase in motor vehicle registration fees as well as by reducing funds allotted to local governments.

The economists also called for the government to cut by half the pork barrel of legislators, a proposal echoed by Boncodin.

They pushed for the indexation of specific taxes on tobacco and alcohol; closing tax leaks and additional efforts by the Bureau of Internal Revenue; increase the value-added tax rate from 10 to 12 percent; and impose a P2 per liter tax increase on petroleum products.

The economists also said "the simple application of taxes on fringe benefits and ceilings on deductions would be a fairer and more prudent way to deal with tax evasion among corporations than the proposed shift" to gross income taxation.

Debt restructuring

De Venecia said all efforts are being done to avert the looming fiscal crisis, but the President may need to officially declare it if the situation continues to deteriorate.

"It will come to that if we do not do anything about it," he said. "However, we have not come to that yet so maybe we do not have to make that declaration."

At a workshop sponsored by United Nations agencies, De Venecia sought a "reasonable debt restructuring" program and urged the UN system to intervene and come up with an expanded debt relief program for borrowing countries.

"We are not turning our backs on our debts but all we want is some reasonable restructuring of debt," he said.

De Venecia said one-third of the proposed P903-billion national budget for 2005 is already allotted to debt servicing and interest payments.

He said under the debt restructuring program, short-term loans will be turned into medium-term loans, medium-term loans to long-term ones, and long-term borrowings into semi-concessional debt.

De Venecia urged the UN, through its visiting Assistant Secretary General Hafiz Pasha, to sponsor a summit between its member lenders and borrowers "at the soonest possible opportunity."

At the workshop, De Venecia sought the review of UN Millennium Development Goals, the global compact entered into by all UN member nations in 2000 for poverty alleviation and human development.

He said the review should consider the debt restructuring program, global security concern over international terrorism, and the need to focus on agricultural modernization for development.

Pasha said the UN system basically does not discuss individual countries’ debt servicing issues.

"It’s a matter that should be discussed and negotiations left between the creditor and (borrowing) countries," Pasha said, but stressed that debt relief is a serious issue and has been taken up by the UN.

"The UN has played a very important role in the civic initiative which is the initiative of providing debt relief to highly indebted poor countries," Pasha added.

At the same time, Albay Rep. Joey Salceda said the negative effects of officially declaring a state of fiscal crisis will not come as feared by some sectors, provided that the declaration is clearly explained to concerned credit agencies.

"Our creditors and international finance agencies understand that this is just a legal maneuver to allow the President flexibility," he said.

Tarlac Rep. Jesli Lapus said the government should only resort to declaring a state of fiscal crisis if it is the only way for Mrs. Arroyo to have elbow room to handle the country’s finances, particularly the IRA.

He said he is in favor of cutting the IRA since local governments are in surplus while the national government — the source of their allocation — is in deficit.

"Moreover, the 20 percent development fund (from the IRA) meant for capital expenditures is being used for non-capital expenditures like for personnel services," Lapus said, adding that local governments have been negligent in collecting local taxes since they heavily depend on the IRA.

Meanwhile, various groups aired their opposition to the President’s plan to impose new taxes.

Economic think tank Ibon Foundation said the government should instead make sure that current taxes are effectively implemented, and pushed for the Arroyo administration to impose an across-the-board tariff hike.

"Higher tariffs are good for the economy because it raises local production. It will dampen imports," Ibon research director Antonio Tujan Jr. said. "With a tariff increase and effective implementation of the current taxes, the foreign exchange rate will surely be stabilized."

Bayan Muna representative Teodoro Casiño said while he generally agreed with the UP economists’ study, increasing the VAT rate and the tax on petroleum products means "the bulk of these taxes would be shouldered not by oil companies or business establishments, but by ordinary consumers."

A new organization, the Professionals Against New Taxes, urged the government to stop giving tax amnesties because it only encourages tax evasion.

The group’s spokesman, Eduardo Castillo, said tax amnesties give "big taxpayers the opportunity to evade taxes legally by just paying a certain increment above their previous year’s taxes or an average of just 10 percent, even though they may have earned a lot more than that." — With Des Ferriols, Paolo Romero, Nikko Dizon, wire services

Reported by: Sol Jose Vanzi

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