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Key Economic Data 
  2003 2002 2001 Ranking(2003)
Millions of US $ 80,574 77,076 71,400 43
GNI per capita
 US $ 1,080 1,020 1,050 135
Ranking is given out of 208 nations - (data from the World Bank)

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Philippine peso (PHP) 



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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