The Philippine Star 04/26/2006
Fund manager and stock market analyst Ignacio Gimenez expressed concern yesterday that the peso may drop back to 56.50 to the dollar if the value-added tax on oil and fuel is suspended or talk of amending the expanded VAT law is prolonged.
"If the government pushes through with the deferment of the EVAT, wholly or partly, Philequity is changing its forecast from P50 to $1 to P56.50 to $1," said Gimenez, president of Philequity Management Inc. who also writes a weekly column for The STAR.
He said any change or suspension of VAT collection "sends a very bad signal to investors as this will show that the government is indecisive and populist."
Gimenez warned that as the proposal alone has already weakened the peso, "interest rates will likely go up and the stock market will likely decline" if these talks continue.
From being the strongest currency in Asia in March last year, he said the peso is now the weakest, closing at 51.90 to the dollar yesterday.
"Whereas Asian currencies and major currencies are rallying strongly against the (US) dollar, the Philippine peso is doing the reverse," Gimenez said.
Since the start of April, the peso has fallen 1.5 percent, while other currencies such as the Thai baht went up 3.3 percent, and the Korean won and Indonesian rupiah improved by 3.2 percent.
Aside from the Philippines, only two Asian countries did not improve their currency — the Chinese yuan did not change from its rate of 8.01 against the dollar, while the Indian rupee fell by 1.1 percent.
The Australian dollar performed well against the US dollar, going up by 4.3 percent. The Japanese yen went up by 2.5 percent, the British pound by 2.2 percent, the Swiss franc by 2.1 percent and the euro by 1.8 percent.
"What the coup d’etat has failed to economically damage, this suspension will succeed in doing. The peso’s strength has so far helped negate or at least cushion the impact of rising oil prices. To tinker with the country’s fundamentals now could lead to a weaker peso," Gimenez said.
He pointed out that a weaker peso would "negate the very purpose of suspending the EVAT on oil and fuel" as well as "exacerbate the effect of high world oil prices."
"If that happens, Philequity will have to reverse its bullish forecast on other Philippine assets as well. Other houses and banks will most likely follow suit," Gimenez said.
Though he admitted that nobody can forecast when oil prices would stop increasing or whether it would drop back to $55 per barrel, "it does not mean that every time oil goes up the government has to suspend the EVAT and every time oil goes down the government will implement EVAT."
Gimenez said the government should prioritize putting its fiscal house in order and not be distracted by external events over which the country does not have any control.
"We hope the government will not change its rules or parameters mid-stream. Pushing through with the suspension of EVAT on oil and power will only confuse investors and jeopardize and erase all the gains that have been made. However, if the government stands pat on its fiscal reforms and program, the appreciation of all Philippine assets should continue," he said.
Earlier yesterday, presidential chief of staff Michael Defensor backed down from the idea to lift the EVAT on petroleum products, acknowledging that this could have a bad effect on the country’s fiscal position.
| Officials against EVAT exemption |
Energy Secretary Raphael Lotilla said while the proposal to exempt petroleum products from the 12 percent EVAT forms part of a comprehensive study by economic managers to soften the impact of oil prices on consumers, "I personally favor focusing first on the possible reduction of tariff duties on oil products.
He said the Department of Finance will shortly submit simulations on the impact of a proposal to lower the import duty of oil products from three percent to one percent.
"If found feasible, this would only require executive action and therefore allow government to be flexible in dealing with a volatile price environment for oil," Lotilla said.
It is up to Congress to decide on the proposed exemption either by amending the EVAT law or adopting a resolution that would lift the 12-percent EVAT on petroleum products.
In order to lessen the country’s dependence on imported fuel, Lotilla said his department hopes the proposed bill calling for petroleum products to be mixed with biofuels will be passed as soon as Congress resumes regular session next month.
Trade Secretary Peter Favila also opposed the suspension of EVAT on oil products.
Favila, who is also the chairman of the National Price Coordinating Council (NPCC), said he consulted with the private sector and the consensus is not to remove the VAT on fuel products.
He said the NPCC is in favor of drawing up mitigating measures to save fuel, such as implementing Daylight Saving Time (DST), a four-day work week or one-day holiday scheme and shorter shopping mall hours for the remaining four to six weeks of summer or until the rainy season starts mid-June.
Of these measures, Favila said NPCC members were unanimous in support of the DST. However, some members opposed the two other measures.
The NPCC and the Department of Trade and Industry (DTI) is setting a one-week period to decide on the proposed mitigating measures so that it can still be implemented in the remaining weeks of summer.
Favila said his opposition to the EVAT suspension is also supported by Finance Secretary Margarito Teves and other members of Mrs. Arroyo’s economic team.
Favila pointed out that last month, rating agencies praised the Philippines for prioritizing its fiscal and economic programs and undertaking the necessary although painful fiscal measures.
He fears that undoing those measures may cause the country more irreparable harm and warned against issuing hasty pronouncements on economic issues.
Teves said rather than suspending the EVAT on oil, the government may reduce tariffs on oil imports from the current rate of three percent to offset rising fuel prices.
This move would lower the government’s annual revenue by P2.5 billion, he said.
The government last year cut the oil tariff from five percent to three percent to counteract a surge in prices. Crude oil for June delivery reached a record $75.35 a barrel last April 21 on concerns that the dispute between the US and Iran may cut supplies from the Organization of Petroleum Exporting Countries’ second-largest producer.
"Taking out the value-added tax on oil products is going to hurt the government’s fiscal program," Teves said. "The economic team will explore other options first."
Removing the value-added tax on petroleum products would cut the government’s annual revenue by as much as P40 billion, he said.
The 10 percent VAT was imposed on oil and other previously exempt products and services on Nov. 1 last year and was raised to 12 percent in February.
The Makati Business Club (MBC) also registered its opposition to the proposal to exempt the oil industry from EVAT.
"We don’t recommend it. If you give exemptions to one industry, others will also ask for it. It’s not going to be good," MBC executive director Guillermo Luz told The STAR.
He said their group understands the idea behind Malacañang’s proposal but is very careful in support ideas that will affect all other businesses and the country’s tax laws.
| Lawmakers react |
Reps. Jesli Lapus of Tarlac, Monico Puentevella of Bacolod City and Exequiel Javier of Antique urged Cabinet officials to closely coordinate their proposals on ways to mitigate the new brewing oil crisis prior to presenting them to Congress.
Lapus, who chairs the House ways and means committee, said amending the EVAT law to exempt petroleum products could result in the loss of the country’s "financial market image gains."
He also said any tax amendment will need a new law, not just a chamber resolution.
Puentevella, who chairs the House transportation committee, said while he is in favor of lifting the VAT on oil products, the government needs to study this very well "or else... lose our present gains with investors and creditors abroad if we change the law."
Javier agreed with the need to study the lifting of the VAT on oil products, but pointed out that the government has other options to mitigate the new oil crisis — reducing the tariff on crude oil from three percent to zero, fast-tracking the privatization of the National Power Corp., and developing alternative sources of fuel and power such as natural gas and ethanol.
Meanwhile, Sen. Manuel Roxas II renewed his call for again exempting the power industry from VAT in order to provide immediate relief for all electricity consumers.
Roxas and 10 other senators filed a joint bill seeking to repeal provisions of the EVAT law in order to exempt the power industry from this tax and delete the limit on power rates’ creditable input VAT.
He is the principal author of the bill, which is supported by Senators Rodolfo Biazon, Miriam Defensor-Santiago, Jinggoy Estrada, Juan Ponce Enrile, Luisa Ejercito, Richard Gordon, Manuel Lapid, Ramon Magsaysay, Ramon Revilla Jr. and Senate President Franklin Drilon.
"With the current crude oil prices at all time highs, which would eventually translate to higher power costs, the resultant higher electricity rates will adversely affect consumers, industries and jobs, investments and the economy in a big way," Roxas said. — With Marianne Go, Michael Punongbayan, Marvin Sy
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