For Gloria Macapagal-Arroyo, oil price rise creates risk and opportunity

By Carlos H. Conde
International Herald Tribune
Published: January 14, 2008

MANILA: As governments around the world find ways to mitigate the impact of high oil prices, the administration of the Philippine president, Gloria Macapagal-Arroyo, might be forced to make decisions that could offset some of the gains made in fiscal reforms, experts and analysts said Monday.

But such steps could earn the highly unpopular president the political goodwill that has eluded her the past four years.

Critics ridiculed Arroyo’s decision last week – when the price of oil hovered around the $100 mark, to cut oil tariffs by 1 percent – saying that its benefits were negligible and that it was designed more than anything else to make better headlines. Arroyo is now under pressure to lift the 12 percent value-added tax on oil products – among them gasoline, diesel and liquefied petroleum gas – to ease the burden on Philippine consumers.

Such a move could have negative consequences, some officials have said. For one, it would mean a loss in government revenues of as much as 54 billion pesos, or $1.3 billion – making it difficult for the government to balance the budget in the next year or two. The International Monetary Fund has warned that the cost of suspending the tax would outweigh the benefit, and ratings agencies have said it could lead to a downgrade.

“Our analysis has shown that the poor are better protected by increasing social spending than reducing energy taxes,” Reza Baqir, the Fund’s representative here, said at a news briefing Friday. “This is so because the benefits of social spending are better targeted to the poor than those of reducing gasoline taxes.”

The trade secretary, Peter Favila, told reporters last week that suspending the VAT would be a step in the wrong direction. “Let’s not go back to our old problems,” he said. “Let’s have faith in ourselves, I am sure we can do better.”

But some analysts and economists view the oil price crisis as an opportunity for Arroyo to regain lost political ground. Swept to power during the People Power revolt in 2001 that ousted President Joseph Estrada, Arroyo earned the ire of the public after she was accused of cheating in the 2004 elections. Surveys indicate that she is now the most unpopular president since Ferdinand Marcos.

And yet, according to Tim Condon, chief economist in Asia for ING, no other recent president has worked so hard for fiscal reforms.

“Fiscal consolidation in the Philippines has been so significant that the authorities have placed the budget,” which had been suffering huge deficits since the 1980s, “on a sustainable footing,” Condon said by phone from Singapore.

Because of Arroyo’s efforts, “the government now has the flexibility to make that move on the VAT,” Condon said. “I think its overwrought to say that this is going to undo the hard-won fiscal consolidation,” he added. The negative impact of the revenue loss from a suspended VAT, Condon said, would be minor.

Ramon Casiple, executive director of the Institute of Political and Economic Reforms in Manila, said the oil price crisis would force Arroyo to think more like a politician than the U.S.-educated economist that she is. “If she thinks like an economist would, she might find suspending the VAT a problem. If she thinks like an astute politician, she could gain from this,” Casiple said.

Adding pressure on Arroyo to cut the VAT is the strengthening peso, which has depressed the effect of remittances from overseas Philippine workers, who send in more than $12 billion annually and are vital to keeping the economy afloat.

The peso, the best performing currency in Asia in the past year, has settled, with the dollar between 40 pesos and 41 pesos, against 45 pesos late last year.

The recent increases, meanwhile, in the price of oil, have increased significantly the prices of basic commodities, like cooking gas and bread.

About Carlos H. Conde

Researcher at Human Rights Watch (@condeHRW @hrw_ph). Former journalist (NYT, IHT, among others).
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