Business World
My colleague, Ms. Margarita D. Gonzales, and I just gave an update on the Philippine fiscal picture in light of recent announcement by the Department of Finance of the end-October numbers to fund managers and holders of Philippine RoPs, who are subscribers to Global Source, a network of independent analysts. This is what I told them:
- The headline clearly is we have already breached government's full- year deficit ceiling (P250 B, 3.2% of GDP) with the year-to-date deficit already at P266.1 billion.
' The national deficit continued to widen as revenues weakened - down 7.6% yoy in October (down 4.8% Jan.-Oct.), still due to an economic slowdown and, more so, tax-reducing measures (e.g., lowered corporate income tax, minimum wage exemptions, reversion to franchise taxes in lieu of other taxes for electricity transmission).
' BIR collections declined again in October (down 5.1% yoy Jan.- Oct.) while BOC collections fell considerably during the month (down 15.7% yoy Jan-Oct ).
- The finance secretary's official comment has been that the department will continue to work harder and endeavor to be more effective in implementing our tax administration measures, hoping that Congress will also support them in their bid for revenue enhancement measures that can bring in sustainable sources of revenues for the government.
' Finance department now expects a P280 B deficit (3.6% of GDP) factoring in sale of SMC shares, but without that , about P300 B (3.8% of GDP)
- Here at GlobalSource Philippines, we are sticking to our assessment made in our last quarterly outlook report. The breach of the official target is in line with our expectations as we look to a number closer to 4% of GDP in 2009 (about P310 B).
- Unfortunately, there is little hope now for narrowing this year' s fiscal gap:
' One, because of the recent typhoons/floods, collections can be expected to weaken further (with calamity losses tax-deductible and possibly some leniency for humanitarian reasons) while there is now even greater pressure for the government to continue spending (for reconstruction and rehabilitation).
' Two, the touted improvement in administrative measures are not expected to add that much to the equation.
' Three, the SMC sale, expected to yield P50 billion or almost one percent of GDP, which is what the government is banking on, involves legal hurdles over ownership. This is a case that has been pending for years, and unlikely to be decided before yearend.
' Also, prospects are weak for other planned privatizations judged by the recent bid failure of a Metro Manila property (FTI complex in Taguig) and the loud protestations by politicians over alleged possible midnight asset sales by an outgoing administration (including protests over the sale of a supposedly hicstorical property in Fujima, Japan).
' Finally, we already see a narrowing (if not closed) window for passage of tax reforms (especially new measures) over the next few months given the May 2010 elections. In fact, it would be best if nothing comes out of this Congress. Why? Given we are already in election season, the risk is that what comes out will be the exact opposite of what is needed as what happened with the Comprehensive Tax Reform package in 1995.
y A good example of a bad measure is recently proposed legislation by an influential congressman, which seems to have the support of the finance secretary, to encourage voluntary advance tax payments to generate P100 billion for flooding reconstruction by offering a discount to the taxpayers. This kind of revenue anticipation, apart from causing confusion in government finance statistics time series data, can only cost government more than if it simply borrowed from a very liquid debt market. Clearly, for taxpayers to find this attractive, the discount government needs to give will have to be at least equal to taxpayers' cost of borrowing, which is much higher than government's own cost of borrowing.
- Now, let us let us look at the prospects for 2010:
' We note that government is sticking to its existing deficit target (P233.4 B, 2.8% of GDP).
' We however are not so optimistic that this is achievable (will likely still breach 3% of GDP given the circumstances, e.g., still tepid growth, lack of needed new tax measures).
' Notably, the tax effort ratio could shrink to pre-2006 levels this year, i.e., the range just prior to the introduction of the expanded VAT, and significant improvement will definitely require that new fiscal reform measures be implemented.
- But, as we had stated in our latest quarterly report, we aren't that worried about the impact on financial markets for a few reasons:
' The continued high level of remittances (up 8.6% in Sep, up 4.2% Jan-Sep, defying previous expectations of a decline) as a robust current account allows a healthy amount of dollar borrowing (enough to calm the peso bond market, and allowing even a pre- funding of next year's requirements) while keeping liquidity conditions loose.
' A deficit of the size currently expected has already been factored in by the markets for 2009 with the consensus that such is manageable.
' Though the deficit will likely not narrow by much next year, it would still be an improvement over this year's fiscal gap ;and we have greater hopes that reform measures can be successfully pushed with the entry of a new and more popular administration.
- In short, while emerging fiscal concerns are certainly daunting with the poor state of government finances and embedded revenue and spending millstone, the new political environment gives us a promising window to animate the country/economy and improve growth potentials over the next six years helping the new government to achieve hoped-for medium-term fiscal consolidation (i.e., reining in future deficits and bringing the debt ratio back on a downward trajectory).
Mr. Romeo Bernardo is Global Source Philippine advisor and board member of The Institute for Development and Econometric Analysis, Inc. He was formerly undersecretary of Finance during the Aquino and Ramos administrations.
Monday, November 23, 2009
Friday, November 13, 2009
Crude solution
Business World
Introspective
Acouple of weeks ago, President Gloria Macapagal-Arroyo issued an executive order that turned back oil prices in Luzon, which has been placed under a state of calamity, to where they were on October 15 as relief to typhoon victims. This added to an already long list of price controls temporarily placed in typhoon-stricken areas on items ranging from rice to sardines to funeral services.
The cap on fuel prices unleashed the sharpest response from the business sector, largely because of the history behind oil price controls. The industry was deregulated only in the late 1990s, and memories of shortages such a policy produced remained fresh in people's minds, not to mention the enormous subsidy cost of trying to stabilize prices.
Local business groups and foreign chambers of commerce have railed against the imposed measure. Their arguments were hard to refute - price controls would only distort supply, spur shortages, create a black market (and black market prices), lead to profit losses for oil firms, and discourage investment. Those who showed some support for the wielding of state powers highlighted the need for it to be used sparingly and within a very limited time.
Even the central bank has spoken up on the issue. A deputy governor of the Bangko Sentral ng Pilipinas (BSP) warned the public on the dangers of price controls, which he said created market distortions and affected availability of supply in the long run. A Palace economic adviser has also weighed in on the issue, arguing how price caps on petroleum products disproportionately benefited the well-to-do and resulted in revenue losses of as much as P4.5 billion (from VAT and income taxes), while opining how it was much sounder for the government to just target help to typhoon victims (e.g., through diesel discounts, discounted fuel access cards for lower-to-middle- income families, and income transfers to the poor).
But the President has kept distance from the debates, leaving it to a task force led by the energy and justice departments to decide whether or not price controls should be lifted. The task force has been meeting with the private sector but says it will need to wait for the verdict of the National Disaster Coordinating Council (NDCC) on how soon the emergency situation can be expected to end. With its hands-off policy, the Palace will also likely let the courts defuse tension, as one of the Big Three (Pilipinas Shell Petroleum Corp.) has questioned the legality of EO 839 and asked for its lifting.
The capping of oil prices may be perceived as merely a well- intentioned but wrong-headed policy designed to ease the plight of calamity victims. However, the lack of a clear effort toward consensus-building hints at a less straightforward agenda, not the first time that the country's leader would play to the gallery (e.g., less than full recovery of power costs until 2004, brief suspension of automatic indexation of water tariffs, and freezing of toll fees).
Apart from failure to confer with industry players, only a few Cabinet officials had apparently been closely consulted in crafting the measure, with the puzzling omission of the secretaries of energy, finance and economic planning and the central bank governor.
At the moment, there is a battle of wills between oil companies and government. Oil companies threaten shortages and shutdowns, while government officials and administration lawmakers warn of the full force of the law. One Palace insider describes the mood in the corridors of power as pregnant with petulance.
The danger is, the longer this is allowed to drag, the messier it becomes for the local fuel market, the harder to unwind, and the worse for the economy in general. Already, arbitrage and shortages are being reported in certain areas in Luzon where oil firms allege they have to sell at a loss, while complaints have been made about escalating prices elsewhere in the country.
The sector to watch out for is LPG (also used for household cooking), a sensitive market that will likely be the first to take a hit because of the weak financial muscle and low profit buffers of independent players who together hold more than a fifth of market share. LPG retailers have threatened to stop sales if price caps continue until December.
Inflation also becomes harder for monetary authorities to manage if the present situation continues, explaining BSP's timely take on the issue. As one central bank official cryptically confided to friends, maybe [the] measure is temporary but caution ensures it will not be permanent. Local pump prices have kept relatively steady despite the rise in world prices purportedly as a result of price wars, but will later have to follow global trends. Keeping rates below market level for a long time will only lead to price surges when ceilings are removed.
For the longer term, the present episode could mean a dilution of the oil deregulation law which the Ramos government took pains to establish. Already, Congress is looking for ways to amend the law and widen the powers of the state to correct abuses especially during special circumstances (e.g., by raising the transparency of price-setting, spurring competition by building up smaller players, or bringing back some form of price regulation).
The quickest break to the impasse would be if both government and oil players agree on a compromise - a discount for typhoon victims perhaps, as what seems to be the emerging consensus, or limiting the measure to highly distressed areas with an agreement to gradually phase in price increases elsewhere in Luzon. The NDCC could also decide that a state of calamity no longer holds, making any court case against the freezing of oil prices academic. Otherwise, oil firms could simply wait for the court system to grant a restraining order on the measure which should not be too long though the relief will be temporary.
The above scenarios still offer the administration a graceful exit from the self-inflicted dilemma.
Government trumpeters have repeatedly assured that price measures will generally be geographically, temporally, and legally bound, but the truth is how long caps on oil prices in particular can last depends entirely on the President. In the meantime, inventories have been dropping as oil importers begin to cancel scheduled purchases - from the usual three weeks to less than two, according to the energy secretary - creating a possible backdrop, some speculate, for a state-led fuel allocation plan. Listening to industry experts, one gets the feel that the longest major players can survive this game is two months and the smaller players maybe just one. Government could of course try to maximize brownie points and stretch oil firms to their limits before it finally folds its cards, but this would be at a great cost ultimately.
(This column is based on a GlobalSource report written for international fund managers entitled Crude Solution, co-authored by Margarita D. Gonzales.)
Romeo Bernardo is board member of The Institute for Development and Econometric Analysis and is managing director of Lazaro, Bernardo, Tiu and Associates, Inc.
Introspective
Acouple of weeks ago, President Gloria Macapagal-Arroyo issued an executive order that turned back oil prices in Luzon, which has been placed under a state of calamity, to where they were on October 15 as relief to typhoon victims. This added to an already long list of price controls temporarily placed in typhoon-stricken areas on items ranging from rice to sardines to funeral services.
The cap on fuel prices unleashed the sharpest response from the business sector, largely because of the history behind oil price controls. The industry was deregulated only in the late 1990s, and memories of shortages such a policy produced remained fresh in people's minds, not to mention the enormous subsidy cost of trying to stabilize prices.
Local business groups and foreign chambers of commerce have railed against the imposed measure. Their arguments were hard to refute - price controls would only distort supply, spur shortages, create a black market (and black market prices), lead to profit losses for oil firms, and discourage investment. Those who showed some support for the wielding of state powers highlighted the need for it to be used sparingly and within a very limited time.
Even the central bank has spoken up on the issue. A deputy governor of the Bangko Sentral ng Pilipinas (BSP) warned the public on the dangers of price controls, which he said created market distortions and affected availability of supply in the long run. A Palace economic adviser has also weighed in on the issue, arguing how price caps on petroleum products disproportionately benefited the well-to-do and resulted in revenue losses of as much as P4.5 billion (from VAT and income taxes), while opining how it was much sounder for the government to just target help to typhoon victims (e.g., through diesel discounts, discounted fuel access cards for lower-to-middle- income families, and income transfers to the poor).
But the President has kept distance from the debates, leaving it to a task force led by the energy and justice departments to decide whether or not price controls should be lifted. The task force has been meeting with the private sector but says it will need to wait for the verdict of the National Disaster Coordinating Council (NDCC) on how soon the emergency situation can be expected to end. With its hands-off policy, the Palace will also likely let the courts defuse tension, as one of the Big Three (Pilipinas Shell Petroleum Corp.) has questioned the legality of EO 839 and asked for its lifting.
The capping of oil prices may be perceived as merely a well- intentioned but wrong-headed policy designed to ease the plight of calamity victims. However, the lack of a clear effort toward consensus-building hints at a less straightforward agenda, not the first time that the country's leader would play to the gallery (e.g., less than full recovery of power costs until 2004, brief suspension of automatic indexation of water tariffs, and freezing of toll fees).
Apart from failure to confer with industry players, only a few Cabinet officials had apparently been closely consulted in crafting the measure, with the puzzling omission of the secretaries of energy, finance and economic planning and the central bank governor.
At the moment, there is a battle of wills between oil companies and government. Oil companies threaten shortages and shutdowns, while government officials and administration lawmakers warn of the full force of the law. One Palace insider describes the mood in the corridors of power as pregnant with petulance.
The danger is, the longer this is allowed to drag, the messier it becomes for the local fuel market, the harder to unwind, and the worse for the economy in general. Already, arbitrage and shortages are being reported in certain areas in Luzon where oil firms allege they have to sell at a loss, while complaints have been made about escalating prices elsewhere in the country.
The sector to watch out for is LPG (also used for household cooking), a sensitive market that will likely be the first to take a hit because of the weak financial muscle and low profit buffers of independent players who together hold more than a fifth of market share. LPG retailers have threatened to stop sales if price caps continue until December.
Inflation also becomes harder for monetary authorities to manage if the present situation continues, explaining BSP's timely take on the issue. As one central bank official cryptically confided to friends, maybe [the] measure is temporary but caution ensures it will not be permanent. Local pump prices have kept relatively steady despite the rise in world prices purportedly as a result of price wars, but will later have to follow global trends. Keeping rates below market level for a long time will only lead to price surges when ceilings are removed.
For the longer term, the present episode could mean a dilution of the oil deregulation law which the Ramos government took pains to establish. Already, Congress is looking for ways to amend the law and widen the powers of the state to correct abuses especially during special circumstances (e.g., by raising the transparency of price-setting, spurring competition by building up smaller players, or bringing back some form of price regulation).
The quickest break to the impasse would be if both government and oil players agree on a compromise - a discount for typhoon victims perhaps, as what seems to be the emerging consensus, or limiting the measure to highly distressed areas with an agreement to gradually phase in price increases elsewhere in Luzon. The NDCC could also decide that a state of calamity no longer holds, making any court case against the freezing of oil prices academic. Otherwise, oil firms could simply wait for the court system to grant a restraining order on the measure which should not be too long though the relief will be temporary.
The above scenarios still offer the administration a graceful exit from the self-inflicted dilemma.
Government trumpeters have repeatedly assured that price measures will generally be geographically, temporally, and legally bound, but the truth is how long caps on oil prices in particular can last depends entirely on the President. In the meantime, inventories have been dropping as oil importers begin to cancel scheduled purchases - from the usual three weeks to less than two, according to the energy secretary - creating a possible backdrop, some speculate, for a state-led fuel allocation plan. Listening to industry experts, one gets the feel that the longest major players can survive this game is two months and the smaller players maybe just one. Government could of course try to maximize brownie points and stretch oil firms to their limits before it finally folds its cards, but this would be at a great cost ultimately.
(This column is based on a GlobalSource report written for international fund managers entitled Crude Solution, co-authored by Margarita D. Gonzales.)
Romeo Bernardo is board member of The Institute for Development and Econometric Analysis and is managing director of Lazaro, Bernardo, Tiu and Associates, Inc.
Monday, November 2, 2009
Oil price controls
Business World
Introspective
The administration recently issued the controversial and poorly studied Executive Order 839 imposing price controls on oil. Economists and industry analysts have observed that, hand in hand with rampant oil smuggling, which an IMF paper euphemistically referred to as underdeclaration of imports due to election-related lenience in 2007, this will encourage full bloom of black-marketing and corruption with the coming 2010 vote.
To provide general background on the issue, the author thought it useful to share the section on Oil Deregulation of a study on the Political Economy of Reform During the Ramos Administration done by Christine Tang and him for the World Bank Growth Commission in 2008. The full report which also covers Water Privatization and Telecom De-Monopolization can be accessed via the following link http://www.growthcommission.org/storage/cgdev/documents/gcwp039web.pdf.
If there is proof of political will on the part of the Ramos presidency or of any other Philippine presidency, let this new oil deregulation law be the proof of that.... - Statement of Fidel V. Ramos. Enactment into law of R.A. 8479, Feb.10, 1998.
The deregulation of the downstream oil industry involved the highly politicized issue of liberalizing oil pricing. Three important considerations were (i) a long history, dating back to the 1970s, of civil disturbance related to oil price adjustments; (ii) the cost was going to be spread out across a wider segment of the population, including well organized, low-income groups such as transport groups that in the past partly paralyzed Metro Manila through transport strikes; and (iii) legislation was required to enact liberalization. Thus, from the start, the Ramos government focused on managing potentially broad opposition to the reform.
Efforts to deregulate the industry started as early as 1993. The Ramos administration launched a nationwide public information campaign to educate people about the workings of the oil market and allay fears of spiraling prices after deregulation. Public acceptance of (or at least reduced resistance to) the proposal was deemed important to get the congressional nod for proposed legislation to deregulate the industry. The Ramos government also committed the reform measure under the country's program with the IMF to help set a timeframe for passing legislation.
Although government officials related that they encountered very little resistance during the nationwide roadshow, what is interesting about this reform experience were the actions of the veto players - the legislature and the judiciary.
As the initial spadework on the proposed bill led up to the May 1995 congressional and local elections, work had to be put on hold as the likelihood of getting congressional approval became slim. While certain nationalist members of the legislature continued to strongly oppose the proposal when Congress resumed in July 1995, the LEDAC mechanism proved invaluable in speeding up congressional approval of the bill. An oil deregulation law was enacted and was in force for roughly 18 months starting in April 1996. During that period, a fully deregulated regime, with the oil companies free to adjust oil prices, had been gradually phased in. In November 1997, in response to a petition by a group of congressmen who had voted against the bill, the Supreme Court declared the law unconstitutional.
At the time, the Philippines was already four months into the Asian crisis. With the peso having lost a quarter of its value, which pushed up domestic oil prices, the Ramos administration was under renewed pressure to reregulate the industry. Nevertheless, the president persisted in pursuing the reform both by trying to get the Supreme Court to reverse its ruling and by asking Congress to pass a new law without the constitutional infirmity cited by the court. President Ramos succeeded in the latter, signing into law the Downstream Oil Industry Deregulation Law in February 1998.
The benefits of oil deregulation became evident during the most recent run-up in world oil prices. The full pass-through of world oil price increases to domestic oil prices helped to shield the fiscal sector from the burden of providing oil subsidies at a time when government finances were most fragile. Other benefits have included (i) increased competition in the industry with the entry of new players; (ii) less politicization of oil pricing; (iii) proper market response to high oil prices, including conservation and the search for substitutes like biofuels; and (iv) clean and good restrooms at service stations all over the country as a by-product of introducing competition in the industry, helping support tourism.
Mr. Romeo Bernardo is Global Source Philippine advisor and board member of The Institute for Development and Econometric Analysis, Inc. He was formerly undersecretary of finance during the Aquino and Ramos administrations.
Introspective
The administration recently issued the controversial and poorly studied Executive Order 839 imposing price controls on oil. Economists and industry analysts have observed that, hand in hand with rampant oil smuggling, which an IMF paper euphemistically referred to as underdeclaration of imports due to election-related lenience in 2007, this will encourage full bloom of black-marketing and corruption with the coming 2010 vote.
To provide general background on the issue, the author thought it useful to share the section on Oil Deregulation of a study on the Political Economy of Reform During the Ramos Administration done by Christine Tang and him for the World Bank Growth Commission in 2008. The full report which also covers Water Privatization and Telecom De-Monopolization can be accessed via the following link http://www.growthcommission.org/storage/cgdev/documents/gcwp039web.pdf.
If there is proof of political will on the part of the Ramos presidency or of any other Philippine presidency, let this new oil deregulation law be the proof of that.... - Statement of Fidel V. Ramos. Enactment into law of R.A. 8479, Feb.10, 1998.
The deregulation of the downstream oil industry involved the highly politicized issue of liberalizing oil pricing. Three important considerations were (i) a long history, dating back to the 1970s, of civil disturbance related to oil price adjustments; (ii) the cost was going to be spread out across a wider segment of the population, including well organized, low-income groups such as transport groups that in the past partly paralyzed Metro Manila through transport strikes; and (iii) legislation was required to enact liberalization. Thus, from the start, the Ramos government focused on managing potentially broad opposition to the reform.
Efforts to deregulate the industry started as early as 1993. The Ramos administration launched a nationwide public information campaign to educate people about the workings of the oil market and allay fears of spiraling prices after deregulation. Public acceptance of (or at least reduced resistance to) the proposal was deemed important to get the congressional nod for proposed legislation to deregulate the industry. The Ramos government also committed the reform measure under the country's program with the IMF to help set a timeframe for passing legislation.
Although government officials related that they encountered very little resistance during the nationwide roadshow, what is interesting about this reform experience were the actions of the veto players - the legislature and the judiciary.
As the initial spadework on the proposed bill led up to the May 1995 congressional and local elections, work had to be put on hold as the likelihood of getting congressional approval became slim. While certain nationalist members of the legislature continued to strongly oppose the proposal when Congress resumed in July 1995, the LEDAC mechanism proved invaluable in speeding up congressional approval of the bill. An oil deregulation law was enacted and was in force for roughly 18 months starting in April 1996. During that period, a fully deregulated regime, with the oil companies free to adjust oil prices, had been gradually phased in. In November 1997, in response to a petition by a group of congressmen who had voted against the bill, the Supreme Court declared the law unconstitutional.
At the time, the Philippines was already four months into the Asian crisis. With the peso having lost a quarter of its value, which pushed up domestic oil prices, the Ramos administration was under renewed pressure to reregulate the industry. Nevertheless, the president persisted in pursuing the reform both by trying to get the Supreme Court to reverse its ruling and by asking Congress to pass a new law without the constitutional infirmity cited by the court. President Ramos succeeded in the latter, signing into law the Downstream Oil Industry Deregulation Law in February 1998.
The benefits of oil deregulation became evident during the most recent run-up in world oil prices. The full pass-through of world oil price increases to domestic oil prices helped to shield the fiscal sector from the burden of providing oil subsidies at a time when government finances were most fragile. Other benefits have included (i) increased competition in the industry with the entry of new players; (ii) less politicization of oil pricing; (iii) proper market response to high oil prices, including conservation and the search for substitutes like biofuels; and (iv) clean and good restrooms at service stations all over the country as a by-product of introducing competition in the industry, helping support tourism.
Mr. Romeo Bernardo is Global Source Philippine advisor and board member of The Institute for Development and Econometric Analysis, Inc. He was formerly undersecretary of finance during the Aquino and Ramos administrations.
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