MANILA, 12 July 2005 — The Philippine economy is beginning to suffer from the political crisis revolving around President Gloria Macapagal Arroyo and her alleged cheating during the last elections.
International credit rating agency Fitch Ratings has downgraded its credit rating outlook on the Philippines from stable to negative. This downgrade has in turn caused falls in stock trading and in the value of the peso vis-à-vis the US dollar.
“A rating downgrade could be triggered by protracted delays in the Supreme Court decision, an eventual decision that the expanded value-added tax legislation is unconstitutional, or continued political disorder,” Fitch said in a statement.
James McCormack, Fitch’s senior director for the sovereign group added that “the (Court’s) temporary restraining order was a major setback for the centerpiece of the government’s fiscal reform program, especially given that no timeframe has been set for a court decision.”
“The eVAT is critical to enhancing the Philippines’ medium-term fiscal prospects and improving its public debt sustainability,” he said.
The eVAT law, which was signed into law in May, keeps the VAT at 10 percent but expands its coverage to include other previously-exempt sectors such as fuel and electricity. The Supreme Court froze the tax measure on July 1, the same day it was to take effect.
At the stock market, renewed concerns of a drawn out political squabble caused the market’s downfall, dealers said. The composite index closed down 23.50 points or 1.25 percent at 1,852.78 on 259.8 million shares worth 1.4 billion pesos. It traded between 1,837.22 and 1,876.28. The broader all-shares index fell 13.45 points to 1,135.24. Losers beat gainers 45 to 11, while 32 stocks were unchanged.
AB Capital Securities research director Jose Vistan Jr said the best scenario would be for critics of Arroyo and the public to forgive her and simply move on, but is highly unlikely leaving impeachment as the only constitutional option to deal with the complaints against her.
An impeachment complaint has been laid against her for betrayal of public trust, but moving it through Congress could take months. “An impeachment process would be a protracted battle that could keep investors away and drag the economy,” Vistan said, adding “it’s not that investors do not want her, but it seems that the market wants to take a short cut to end the political volatility.”
The situation was almost the same at the peso-dollar mart where the value of the peso slipped to P56.24=$1 after closing at P56.06=$1 last Friday.
Analysts said the resignation of key members of Arroyo’s economic team, including her secretaries for finance, budget and trade and chiefs of the revenue bureaus BIR and Customs, has sent a strong signal to investors that Arroyo has lost control of the economy.
Resigned Finance Secretary Cesar Purisima had said Malaca?ang even played a key role in getting the Supreme Court to suspend the implementation of the expanded Value Added Tax (eVAT) because Arroyo was worried over the public’s response.
Arroyo had pushed hard for the eVAT to reduce the country’s budget deficit.
Her inability to carry out her own programs means she is no longer capable of governing the nation effectively, said Purisima and her fellow Cabinet members who resigned.
