Teves in race to fix Philippines' economy
By Jennee Grace U Rubrico
MANILA - Philippines' Finance Secretary Margarito Teves is running short on time. Before a new set of political leaders is elected in May, he is scrambling to contend with a ballooning budget deficit, boost revenues to pay for past pump-priming efforts and manage the way ahead in a recovering but still unstable global economy.
In response to the global economic crisis, President Gloria Macapagal-Arroyo's government ramped up fiscal spending. Last year's budget deficit amounted to nearly 300 billion pesos (US$6.5 billion), or 3.7% of gross domestic product (GDP), compounding what was already a troublesome national debt profile at 58% of GDP.
Before leaving his post, Teves says, he plans to privatize 30 billion pesos (US$642 million) worth of government assets in an effort to begin to plug the budgetary shortfall that will face the new administration to be elected in May. The government failed in 2009 in its attempts to sell the same state assets and it's not clear despite signs of recovery it will be successful in the weeks ahead.
Market analysts have expressed concerns that the election season will distract the government from improving tax collection and that the political flux will stall revenue reforms and weigh against badly needed fiscal belt-tightening. In a wide-ranging interview, Teves rang a warning about the need to reduce budget deficits. He also looked back at his handling of the global economic and financial crisis.
Asia Times Online: Could you elaborate on your budget deficit and privatization plans?
Margarito Teves: The deficit, based on our likely scenario, was 290 billion pesos in 2009, representing about 3.7% of gross domestic product. For 2010, we're projecting 293 billion pesos, representing 3.5% of GDP. Since we're anticipating the GDP to improve, the denominator will be larger, even if in absolute amounts there's a nominal increase of about 3 billion pesos
In terms of privatization, we're trying to dispose of Food Terminal Inc and [a stake in] PNOC-Exploration Corp. These have been on the auction block for quite some time. Last year, we suffered from very unfavorable market conditions, so that's the reason why we deferred disposing of these assets.
A third item - but we're not selling, we're merely leasing - is the Fujimi property. These three assets, together with small-ticket items, will hopefully amount to about 30 billion pesos. Hopefully, we can try to dispose of this by the end of the first quarter if we're lucky, and if not, not exceeding the early part of the second quarter. Our target is really to try to get the proceeds by the end of the first quarter.
ATol: Why are you pushing this before the May 10 election?
MT: I'm not talking about the election, really. It's more in terms of trying to contain the deficit because normally the best time to undertake infrastructure activities is during the first six months because of the weather conditions. And we're coming unfortunately from a low revenue base in 2009.
Probably it's the first time we have experienced this, although I checked with the IMF [International Monetary Fund] and other international institutions, [and] a number of countries have also suffered a decline in their revenue base, largely as a result of the global financial crisis.
We have this situation where we cannot immediately increase the revenues, yet there are expenditures that are necessary during the first six months, so we need to have a fallback. So that's the reason why we're hoping that we can dispose of these assets. But we're not fortunate in convincing congress to approve revenue-enhancing measures. At the same time, there has been an additional burden for us because of a number of revenue-eroding measures.
For example, over the last year and a half, we had major ticket items like the additional allowances granted to middle-income employees; the corporate income tax has been included for a long time in the provisions of the expanded value added tax; the conversion of the way we tax distribution public utilities from value added tax to franchise tax; the PERA [Personal Equity and Retirement Account] law; the incentives given to the tourism industry; the approval of setting up more economic zones.
All of these really unfortunately reduced the gains that we achieved from the expanded value added tax. We have a situation where we suffered largely because of the slowdown in economic growth, which in turn was an effect of the global economic crisis. It came at a time when we needed to spend to counter the adverse effects of the global recession, and congress has decided to pass a number of these revenue-eroding measures without the corresponding revenue-enhancement measures to compensate. That's why it's been a very difficult period for us.
ATol: The government aimed to achieve a balanced budget by 2010, but now we're looking at a likely 293 billion pesos deficit. Is it realistic then to work towards a balanced budget by 2013, the new target set by your government?
MT: 2013 is a possibility. But the situation can be supported based on the target if, (a) the incoming congress, with the support of the new administration, working together, they can decide to restore those losses we have suffered because of these revenue-eroding measures; and (b) the [Bureau of Internal Revenue, or BIR] and the Bureau of Customs will still have to continue improving on their collection efficiency by a combination of tax administration measures, customer enhancement programs and governance measures. And hopefully there are no more revenue-eroding measures in the future.
But if that is not possible, hopefully congress will say, together with the administration, that if there are additional revenue-eroding measures, there will have to be a corresponding set of revenue-enhancing measures. In other words, for every one peso of [revenue-eroding measures] approved by congress, there should be a corresponding peso [for revenue enhancement], and let the rest be handled by the improvement of collection efficiency. Otherwise, it's going to be very tough.
So the medium-term trajectory is there. How long it will take will depend on the new administration because this administration will be phasing out. A lot of the decisions will be done by the new administration, so they can decide whether they would still want to achieve a balanced budget in 2013 or later. We have no control on what the new administration will decide on. They might want to lengthen [the timeframe] a little bit, they might want to increase spending, they might have a different assessment on what kind of deficit numbers they will have over time.
We're just saying that international institutions and investors would normally like to see a medium-term plan which shows a trajectory of the deficit going down, and the debt-to-GDP ratio also moving down. I think that's the most important thing. How fast and to what extent is secondary to the seriousness of the administration in that kind of a plan.
ATol: How would you assess the government's fiscal performance relative to the medium-term plan? Looking back, were the assumptions made to move towards a balanced budget in 2004 realistic?
MT: We've made a comparison of fiscal deficit versus program. Except for 2009, we've hit our target. In fact, we were below the target. 2009 is really an aberration, and that's why the international institutions and private banks are discounting 2009. Without the 2009 figures, it would have been possible for us to achieve a balanced budget.
Without the global financial crisis, the pressure on congress may not also have been intensified in terms of approving these revenue-eroding measures. So in terms of numbers alone, without the circumstances behind the numbers, except for 2009, we were able to achieve our yearly target - in fact we were below our yearly target. I recall we could even have balanced the budget in 2007, but no one expected us anyway to balance our budget.
ATol: You could have balanced the budget in 2007 but decided not to?
MT: If we were just focused on balancing the budget as an end objective, we could have done that. But then behind the objective you have to ask yourself: is there a better objective than purely nominally achieving a balanced budget by 2007? Nobody expected a developing country like the Philippines to balance the budget earlier than programmed.
So we thought that we needed to spend a little bit more to try to have higher economic growth rather than attain the objective of balancing the budget by itself. So that's the reason why we did not decide to balance the budget in 2007. Because we were not expected to anyway, and secondly at that time we thought it was better to spend.
ATol: The Asian Development Bank and others have expressed concern over the government's high debt levels. Between pump-priming and reining in the deficit, what is the government now prioritizing?
MT: It's a very difficult question to answer. We would like to do both. We'd like to make sure that spending for infrastructure and social services will be there to achieve even modest economic growth. If we spend too much without the revenue-enhancement measures, we will end up with a very large deficit. It's not the ideal condition, but a balancing act that we have to go through.
That's the reason why the new administration will be able to address this, perhaps with more flexibility because historically a new administration gets a honeymoon period of anywhere between six months and one year to undertake more aggressive reforms. And hopefully these reforms will include revenue-enhancement measures to compensate for the losses we experienced over the last year and a half. With more revenues, there will be more flexibility to achieve higher economic growth without necessarily going into more deficit and public debt.
ATol: How will a downward revision in collected revenues affect the deficit cap for this year?
MT: You can have two situations. One is to suppose economic growth worldwide is better than what had been forecast earlier. Then it might have a positive effect on the economy of the Philippines. A higher GDP will normally result in more revenues. The assessment or review can be more positive than negative. We have to check, what are the circumstances that will lead us to (a) higher revenues, or (b) to lower revenues? We cannot do that now because the situation is still not very clear.
ATol: Investment bank Credit Suisse noted in a recent report that dwindling tax collection, which fell from 14% of GDP in 2008 to 12% last year, is a cause for concern. How do you respond?
MT: That's in terms of tax effort. That's precisely what I'm saying: 2009 is an aberration. It's a cause for concern, but more so if we don't correct it under normal conditions. Since 2009 is an abnormal condition, it is a cause for concern, but more important is, can we reverse the situation as we move towards a more normal condition?
ATol: The report also pointed out that no large tax evader has ever been convicted in the Philippines.
MT: In a program like "Run After Tax Evaders", we need a combination of other agencies to support us. Strictly speaking, prosecution and conviction are outside the jurisdiction of the BIR and the Bureau of Customs. While we need to improve on the quality of the cases filed, the movement and decisions related to the cases are not strictly within our control.
ATol: Back to privatization, there has been some resistance over the proposed sale of the PNOC-EC stake, that it would erode government revenues from the enterprise. Has this been taken into consideration in the privatization plan?
MT: Let's look at the consequence. The first priority is to collect taxes from existing measures. There's a limitation to what we can do, and there's a time element associated with it. What if we are not able to collect the total resources that we need?
Since congress is not in a position to provide us with revenue-enhancement measures, the next step is, can we dispose of some assets? What if we don't dispose of these assets? The third alternative is to borrow. Is that a better option than tax revenues and disposal of assets? Essentially, that's how we decide. Given the fact that this spending, especially for the poor and to stimulate the economy, is necessary, our options are very limited.
ATol: The FTI property you mentioned earlier has been auctioned and failed on three separate biddings. Why do you think it can be sold this time around?
MT: There's no assurance. Market conditions are a function of the demand for a certain commodity and in this case property, and the decision and willingness of the seller, and this time it's the government to dispose of that property. It's a question of forces of supply and demand.
ATol: Are market conditions better this year compared to last year?
MT: Relatively, but translated into action, we don't know.
ATol: This administration has four months to go before the election. How realistic are the privatization targets we're looking at?
MT: We will not talk about whether they are realistic until the situation is there for us. All we have to do is to keep on plugging until such time when D-day comes, and then we will be able to determine whether we have a buyer that can handle the kind of price [at which] we're willing to sell.
ATol: How would you assess your tenure in office?
MT: I normally have difficulty assessing my own failures and achievements, so I'd rather have somebody else do that. Let's put it this way: between the two, I'd rather make an assessment - and this will be part of my terminal report - on where I have not done too well and what the next administration can probably consider based on what I can convey to them. But I'm not going to telegraph that now.
Jennee Grace U Rubrico has been a journalist for over 10 years.
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