At the rate the President's fiscal measures are being taken up in Congress, analysts are becoming more and more worried that we're headed for a crisis -- one in the truest sense of the word.
Already, rating agencies have warned of another credit downgrade if nothing is done to improve the government's fiscal position.
Worrisomely, the way things look, only three bills are likely to pass before the end of the year -- Attrition Law (yawn), Tax Amnesty (good grief) and a diluted alcohol and tobacco tax, which will raise the impressive amount of PhP3 billion to PhP6 billion, much less than the DoF-estimated PhP14-billion potential revenues.
A one-notch credit downgrade is expected to raise the government's financing cost by about 25 basis points, which translates into additional interest expense of PhP400 million on a $3-billion refinancing requirement for 2005 of the national government and Napocor alone (i.e., not counting additional costs of new deficit financing and borrowings of the private sector). The increased spreads moreover will likely be accompanied by higher base interest rates given expectations of further monetary tightening particularly in the US (interest rate on three-month dollar commercial paper projected to increase from 1% in 2003 to 5% by 2006).
It is unfortunate that after belatedly and reactively recognizing that the country is facing a crisis and pushing spreads on Philippine bonds up by almost 100 bps, the President and Congress have yet to do something that the market respects as addressing the fiscal problem.
Indeed, the only thing worse than denial of a serious situation is to recognize it but then be completely incapable of doing anything about it.
And time is running out.
Even as another corruption scandal, this time involving the military, grips the nation and sows unrest among junior officers, world oil prices are rising at a dizzying pace not seen since the 1980s oil price shock. While oil prices today, in inflation-adjusted terms, are still about 40% lower than prices then and economies worldwide have since become less dependent on oil, for a country like the Philippines that's dependent on imported oil, higher oil prices translate directly into larger foreign exchange outflows.
This is worrisome as one of the country's strengths to date (and one aspect that distinguishes it from Argentina) is its current account surplus, recorded at over $3 billion last year. Even under more favorable oil price assumptions (around $33/bbl for Dubai crude oil), the surplus is already expected to fall to about $1.5 billion this year and around $650 million next year. What more if prices were to stay where they are today (almost $38/bbl as of Oct. 22)?
Obviously, the Bangko Sentral ng Pilipinas is worried. It has been urging the government to borrow a bigger percentage of its financing requirements externally. A $650 million current account surplus is clearly not enough to cover the $3-billion estimated refinancing requirement. If oil prices persist at current levels and if the government remains unwilling or unable to tap external financing sources, the impact will be declining foreign exchange reserves and reduced cushion against event risk.
What's more, given the country's increased exposure to the capital markets and markets' wont to telescope future events to the present, a fiscal-cum-financial crisis may even come sooner than expected. Who knows what event or series of events will trigger a rush to the exit? Non-passage of revenue measures and perception of the government's inability to resolve its self-declared fiscal crisis? A ratings downgrade? Global interest rates rising faster than expected? A bigger oil price shock? A confidence run on one of the bigger banks given still high nonperforming assets in some banks and their generally large holdings of government securities? Another coup?
Dark clouds loom. Government can still forestall a crisis but it must act NOW.
Passing a watered-down version of the "sin" tax bill does not help convince markets of the government's resolve. Congress must do more.
In the meantime, the Executive can on its own, signal intent to address the fiscal problem through a number of measures, e.g., withholding some percentage of the internal revenue allotment to local government units, imposing a minimal and temporary import surcharge while Congress is in recess (clearly second-best but may be resorted to under present circumstances), raising motor vehicle registration fees, permitting the SSS to raise its contribution rate, permitting increases in user fees (e.g., toll fees, rail fares) to reflect costs, among others.
One of the key lessons from the Asian financial crisis as well as from Argentina's multiple crisis is that countries with strong economic fundamentals when crises hit are better able to weather negative shocks.
No one can prevent storms from coming. But one can certainly reinforce the shutters to withstand the winds and protect the house from costly damage.
The author was Finance undersecretary during the Ramos administration.
