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Gloom looms large over Philippine economy

Philippine President Gloria Macapagal Arroyo, center, before the start of the National Economic Development Authority board meeting yesterday. Philippine stocks fell and the peso weakened after credit-rating agencies Fitch and Standard & Poor's downgraded outlooks for the Philippines. PHOTO: AP

A protracted political crisis and delayed fiscal reforms are casting a long shadow over the Philippine economy, already beset by a yawning budget deficit and a huge debt, with analysts predicting more gloom amid a looming credit rating downgrade.

International rating agencies Fitch and Standard & Poor's on Monday cut their credit outlooks for the Philippines to negative from stable, citing political and economic uncertainty amid the clamor for President Gloria Macapagal Arroyo's resignation.

The country's credit rating is already at junk levels and a negative outlook signals a possible further downgrade that will raise borrowing costs for one of Asia's top sovereign debt issuers.

The move came less than two weeks after the Supreme Court suspended implementation of an expanded value-added tax, Arroyo's key economic policy goal aimed at reducing the budget deficit, sending the stock market to six-month lows and the peso near its record low against the US dollar.

It compounded the woes of Arroyo, who is fighting for survival after Cabinet defections and growing calls for her resignation over claims she cheated in last year's election.

The resignations of Arroyo's economic, trade and budget secretaries -- among 10 Cabinet members who quit on Friday and urged her to follow suit -- also spurred concerns of possible paralysis in economic policy.

Former Finance Secretary Cesar Purisima, who led the mass resignations, complained that the Cabinet's sole focus on Arroyo's problems had put the day-to-day business of governance on hold.

"Arroyo has been able to neutralize the opposition for now, but there is a bigger enemy: the economy," political commentator Benito Lim said.

With nearly half of the country's 84 million population living below the poverty line of US$2 a day, frustrations are growing as rising oil prices increase the costs of basic goods, unemployment worsens and the economy deteriorates, he said.

"If she doesn't put the house in order, it can fuel social unrest and this can spell the end of her administration," Lim said.

The economy grew 6.1 percent last year -- the fastest in 15 years -- but the Asian Development Bank warned last week it would slip below 5 percent this year. So far, the government is sticking with its growth forecast of 5.3 percent to 6.3 percent this year, but says it will likely closer to the end.

With the peso hovering near its all-time low of 56.45 to the US dollar and stocks tumbling, local research group Ibon Foundation has warned that more financial bad news could prove fatal for Arroyo's administration. A weaker peso means already high oil prices will cost even more, which in turn would lift the cost of basic goods and inflation, possibly prompting the Central Bank to raise interest rates.

"If [the] peso slides to 65, even big businesses and [the] trade sector supporting her now will feel that it's too much to pay for the president to stay in power," Ibon said.

However, some economists believe that a robust agriculture sector and the US$9 billion in remittances sent home each year by overseas Filipino workers will cushion the turmoil's impact. At the same time, with no sign of the political crisis abating, high oil prices and a prolonged suspension of the VAT, the economy is likely to suffer, they say.

Arroyo won at least a brief reprieve over the weekend after influential Roman Catholic bishops refused to join in calls for her to resign. But opposition groups are pressing ahead with plans for major rallies this week.

"It's going to be a tug-of-war in the near-term until some clearer signs emerge," said Christy Tan, currency strategist at Bank of America in Singapore. "Until the market can see the beginning of an end to the political uncertainty, there is risk for the peso to test new lows and other Philippine assets will continue to face selling pressure."

The Supreme Court was to hear arguments on the frozen VAT law tomorrow.

The government said the additional revenues of about 100 billion pesos (US$1.7 billion) a year are needed to pay off the debt of nearly US$70 billion and balance the budget by 2010.

"That is the key element of the reform program. If the e-VAT is pulled out, it will plunge the Philippines into a deeper debt trap and shake investors' confidence," said Nizam Idris, economist with Singapore-based IDEAglobal.

Acting Finance Secretary Roberto Tan pledged to stick to economic policies, with new measures to raise revenues, strengthen the banking system and improve the investment climate in coming months.
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