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Books on The Philippines
REPUBLICAN REFERENCE
Area (sq.km)
300,000
Population
84,619,974
Capital
Manila
Currency
Philippine peso (PHP)
President
Gloria
Macapagal-Arroyo
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Update No: 016 - (05/05/05)
Constitutional amendments next on Congress agenda
Once the revenue reform measures, which President Arroyo has cited as being
critical for the economy, are passed, the House of Representatives is expected
to focus its attention on the proposed amendments to the 1987 Constitution.
House Speaker Jose C. de Venecia Jr. has said that discussions on the charter
change issue could start as early as August, in time for the opening of
Congress' second regular session. Mr. de Venecia is an ardent supporter of
charter change.
Influential groups in Philippine society have been pushing for the
Constitutional reforms to allow the shift in the form of government from
presidential to parliamentary, which they argue would overcome much of the
dysfunctionality of the present system. Charter change could also see a shift to
a federal system in order to provide a greater degree of autonomy for Muslim
Mindanao. Also included as part of the plan is a lifting of the restrictions on
foreign ownership of land, utilities, media and other industries included in the
investment negative list. This, it is argued, would stimulate greater foreign
investment into the Philippines and thereby enable higher levels of economic
growth.
More Filipinos are now beginning to take the view that Constitutional amendments
hold the key to cure the rampant corruption in the government, fast track
legislation of priority bills, resolve the armed conflict in Muslim Mindanao,
and draw the much-needed foreign capital which has been avoiding the Philippines
for several years now. Certainly, the present system does not appear to be doing
that well.
President Arroyo is known to oppose any charter change - or even discussion of
it - until the economic reform package is in place but many congressmen have
other ideas. Part of the delay in approving the VAT reform law could be due to
horse-trading going on to put constitutional form back on the agenda sooner
rather than later.
Playing the China Card
Better days in the Philippines-China relations still lie ahead, Presidents
Gloria Macapagal-Arroyo of the Philippines and Hu Jintao of People's Republic of
China said, following the signing of agreements that are expected to help boost
the Philippine economy over the next two years.
The three-day state visit of Chinese President Hu Jintao in Manila from April 26
to 28 has led to the signing of 14 documents which will facilitate the inflow of
US$1.64 billion worth of fresh capital, loans and aids from Beijing.
These include 10 government-to-government and four business agreements covering
US$1.10 billion in investments, US$524.2 million in concessional loans and
US$2.5 million in grants.
Of all the documents, most worthy of note is the US$950 million proposed
investment between PHILNICO-Jinchuan and Shanghai Baosteel Co. for the
redevelopment of large-scale nickel and cobalt mining processing at the Nonoc
mine in Surigao province. Evaristo Narvaez Jr., chairman of the Pacific Nickel
Philippines, Inc. and Governor Chen Yuan of the Development Bank of China signed
the agreement.
Another agreement was signed to facilitate construction and financing of Phase 1
and Phase 2 of the Malolos City-Clark, Pampanga leg of the Northrail Project.
Jose L. Cortes, Jr., president of the North Luzon Railways Corporation and Ren
Hongbin, president of the China National Technical Import and Export Cooperation
signed the accord.
Finance Secretary Cesar Purisima and Yang Zilin, governor of Export-Import Bank
of China, signed a general loan agreement to provide US$500 million of
preferential buyer's credit facility for the Northrail project.
Trade and Industry Secretary Juan B. Santos and Chinese Commerce Minister Bo Xi
Lai signed a memorandum of understanding to facilitate Philippine participation
in the Early Harvest Program of the ASEAN-China Free Trade Agreement. The two
officials also signed agreements on infrastructure cooperation and promotion of
trade and investment cooperation.
Aside from the signed agreements, the Department of Finance said that Chinese
investors are set to invest US$25 million in a medical tourism project at the
Clark Special Economic Zone in Pampanga and US$300-million in glass factory at
the Subic Bay Freeport in Zambales.
President Hu's visit in Manila marks the 30th year of the diplomatic relations
between the Philippines and China. "Let's join hands, seize the
opportunities, be innovative and work together to add a new chapter of
China-Philippine amity, good neighbourliness and cooperation and create a better
future for our region," the Chinese president told Filipino legislators
during a joint session of Congress on April 27.
Government underwhelms
April 30 has come and gone without the promised compromise VAT bill emerging
from the bicameral conference committee. Earlier Senate President, Franklin
Drillon, had said that the new VAT law would be ready by the end of the month.
Is this just another missed deadline… or is there more to it?
The performance of government since the election of May last year has been
underwhelming, to put it mildly. Increasingly, a number of the brightest and
best appear to be throwing in the towel and quitting the administration in
frustration. The latest to leave is Ms. Haydee Yorac, chairperson of the
Presidential Commission on Good Government and winner of the 2004 Ramon
Magsaysay award for government service. Her resignation, it seems, had little to
do with her poor state of health and much to do with the pressures placed upon
her over the handling of key issues - most notably the Coco Levy Fund and the
degree of government involvement (or lack thereof) in San Miguel Corporation. In
particular, the issue of SMC stock rights, which raised an additional capital of
PhP17.8 billion for SMC, but which in the process diluted the government's
shares and also increased the stake of Japan's Kirin Brewery Ltd. which now
claims an extra board seat (three in total) at the expense of the government -
which lost one of its five seats. That issue is complex and really deserves an
article in its own right but the point of the matter is the increasing
interference by Malacañang officials in the way departmental secretaries and
other statutory office-holders go about their jobs. The signal being given is
that despite "talking the talk" on good government, Malacañang is not
allowing senior government people to "walk the walk". Appeasement of
vested interests appears to be writ large in some quarters at least.
Disenchantment is growing.
And if appeasement of vested business interests is part of the game plan then so
to is appeasement of the masa. Again, we have the all too familiar pattern of a
national holiday being declared for Monday May 2 (in lieu of Sunday May 1),
dressed up as being in line with the president's plan to give workers more time
with their families and supported by the theory of "holiday
economics." In reality it had much more to do with the desire to defuse
growing tensions and keep workers at home for May Day and off the streets in
mass protest actions. Again the holiday was only declared on Friday April 29th
giving business no time to adjust or readjust schedules. How else too do you
explain the ongoing failure of government to resolve the Erap plunder case - or
a host of lesser cases? Rather than a new broom sweeping clean, government often
appears to be a feather duster flicking at the specks.
If this state of drift continues-and it has every sign of doing so - then the
administration and Congress would seem to be playing a dangerous game with one
another. The charitable view to take is that the government is hoping that by
appeasing all parties for the moment, it will buy the necessary time for new
growth drivers - be it VAT, China or the mining industry (or a combination of
all three) to cut in and bail the country out. If that happens, government can
avoid having to take any of the really hard decisions that appear to be needed.
The danger however is that the government will end up satisfying nobody. The
present situation has all the signs of an 11th-hour face-off.
Already we are hearing of plots and rumours of plots. In Cavite, the dormitory
province just south of Manila, the Guardians Brotherhood, a para-military
fraternity with links to past coup attempts is rumoured to be on a recruitment
drive. It is no wonder that the government is concerned.
Which brings us back to the VAT issue. The VAT bill is acknowledged as the
single most important issue needed to avert a fiscal meltdown. By delaying
or-even scuttling-the proposal to increase the VAT from 10 percent to 12
percent, the danger is heightened of a real fiscal crisis emerging. Is there
some hidden Machiavellian game plan at work here by some members of Congress
actually to bring on the crisis as a way of ensuring the administration does not
serve its full term?
It is a frightening scenario and not one that we wish to own; we still hope that
the VAT bill will emerge relatively unscathed and that the downhill slide will
be arrested and reversed. But it is a scenario that is now starting to emerge as
a distinct possibility. Congress may be hoping to force the issue of charter
change and hasten the move to a parliamentary government. But if reason does not
prevail they may end up with the country in the hands of a military junta. We
hope we are wrong.
President sticks to her guns on the rate increase
With the joint congressional committee remaining sharply divided as to the
optimum means of increasing the revenue collection of government, President
Arroyo has again reaffirmed to members of Congress that raising the value-added
tax rate (VAT) from the present 10 percent to 12 percent is the preferred option
- indeed the only option. Congress had set itself until the end of the month to
finalise a bill seen by many as the cornerstone of the government's tax reform
programme. Despite the late hour, both houses continue to engage in brinkmanship
with no sign of settling their differences.
Members of the bicameral conference committee remain divided as to the
appropriate VAT rate to impose to ensure that adequate revenues are generated
for the government while ostensibly limiting the burden on poorer members of the
community. The government's target is to collect as much as PhP80 billion in
additional taxes this year to cure the burgeoning budget deficit. Economists
claim that in fact more than PhP100 billion is needed if additional funds are to
be injected into revitalised government programmes.
President Arroyo has been adamant that the way forward is to increase the VAT
rate to 12 percent, rather than by raising the corporate income tax rate from
the present 32 percent to 35 percent. This latter option looks superficially
attractive in that it would place the burden of tax on profitable companies but
it would be difficult to collect and could in fact depress economic activity
since corporations in the Philippines are already taxed at higher rates than
elsewhere in Asia.
The Philippines' tax rate is certainly the highest in Southeast Asia, with the
maximum corporate income tax rate standing at only 30 percent in Indonesia and
Thailand, 28 percent in Malaysia and Vietnam, and at only 20 percent in Cambodia
and Singapore. According to reports, the Philippines has the 26th highest
corporate tax rate in the world - or it would do, if people paid their tax.
Argentina, which has been hit by a financial crisis and often compared to the
Philippines, imposes a maximum corporate income tax rate of 35 percent on its
corporations.
Advanced economies such as the United States and the Netherlands have a maximum
corporate income tax rate of 35 percent while France, Italy and Belgium have 33
percent.
President Arroyo believes that there is no other option than to impose higher
VAT rates if the administration is to cure the country's fiscal woes. While the
government accepts also the need to increase collection efficiency, this will
take time and it is abundantly clear that creditors want to see immediate
action. "While seemingly bitter for all of us to swallow, I know that this
pill will save our economy from fiscal demise that could stem from having one of
the narrowest revenue bases in the world," she said.
In 2005, the government expects to incur a budget deficit of PhP180 billion,
although this will be slightly lower than the P187-billion deficit reported in
2004. In the first quarter of 2005, the budget deficit hit PhP63.5 billion,
higher than the PhP56.847 billion recorded a year ago. However, the government
believes it is still on target for the year as a whole.
Inflation rate seen hitting 7.1 percent in 2005
The Bangko Sentral ng Pilipinas (Central Bank) has adjusted upward its
projected baseline inflation rate for 2005 to a range of 6.8 to 7.1 percent from
the original range of between 5 to 6 percent. According to the bank, the
proposed increase in transport fares plus the impending minimum wage adjustments
would add further push factors to the national average inflation rate, which
stood at only 5.5 percent for 2004 as a whole.
To curb rising inflation, the monetary board of the Central Bank had earlier
adjusted its overnight rates by 25 basis points and has not ruled out the
possibility of another adjustment in coming weeks.
This early, transport groups are asking for a PhP2.50 increase in the minimum
jeepney fare and for a PhP3 adjustment in bus fares. Economists said that while
the immediate impact of the transport fare adjustment would be minimal, this
would have flow-on repercussions on the prices of basic commodities. Should the
government give in to the fresh call for transport fare increases, subsequently
it would have to contend with the labour groups' demand for wage increases.
Malacañang Palace has already signalled its inclination to support the call of
labour groups for a wage increase although this may be more out of the need for
political manoeuvring than anything else.
According to the Asian Development Bank (ADB), the inflation rate in the
Philippines is expected to be the highest among East Asian countries in 2005,
because the Philippines is most dependent on imported oil. The ADB also expects
that interest rates would rise slightly in most East Asian economies this year,
and are likely to be influenced by a number of factors, such as inflationary
pressures and growth prospects, movements of regional currencies against the US
dollar, and US interest rates.
The Economist Intelligence Unit predicts inflation in the Philippines will rise
this year to 6.3 percent for the year as a whole before falling back to 5.4
percent in 2006.
Market Movements
The Philippine peso stabilised at 54.4 against the US dollar over the
five-day currency trading in the last week of April, shrugging off reports of
weak growth of the US economy during the first quarter of 2005. As of April 29,
the peso was trading at a range of 54.3 to 54.5 against the greenback near
trading's closing period, ahead of a long three-day holiday in commemoration of
Labour Day.
Meanwhile, the Phisix, the main barometer of the 30-company Philippine Stock
Exchange (PSE) lost 12 points over the five-day market trading to close at
1,854.63 on Friday 29th April. Fresh news of strong first-quarter earnings of
select companies and a spate of new investment reports provided a slight push to
the local stock index.
Analysts expect that its performance in the month ahead will be influenced by
Congress' action on the new value added tax (VAT) law and a possible adjustment
in key interest rates by the Central Bank to curb inflation.
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