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PolicyOctober 28 2009

Finance minister Margarito Teves on reducing debt and raising revenues

Margarito Teves, secretary of the Department of Finance of the PhilippinesThe Philippines' finance minister says that the archipelago's economy has remained relatively resilient during the downturn compared with its export-dependent neighbours. But the budget deficit remains an ongoing problem. Writer Michelle Price
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Finance minister Margarito Teves on reducing debt and raising revenues

At the age of 66, Margarito Teves, secretary of the Department of Finance (DoF) of the Philippines, cuts a grandfatherly figure: courteous, calm and softly spoken, he appears in many ways ill-suited to the oft-undignified rough and tumble of Filipino politics. Appointed to the role by President Gloria Macapagal-Arroyo following the mass resignation of her cabinet in July 2005, however, Mr Teves' elevation from banker to finance chief was borne of controversy and he has not since flinched from political conflict. His, after all, is a tough gig: tasked with balancing the country's books, Mr Teves has spent the past four years doing parliamentary battle in a bid to shore up the country's desperately leaky revenue base and boost its frequently disappointing economic performance.

Yet despite these ongoing difficulties, the Philippines has fared surprisingly well during the past year. While the archipelago has not emerged entirely unscathed from the global slump, which all but devastated economic output in several neighbouring countries, it has proved pretty resilient. Unlike its many export-dependent neighbours, the country's exposure to the collapse in global trade has proved relatively small: while the Philippines saw a sharp downturn in economic output in the first quarter of 2009, gross domestic product (GDP) growth bottomed out at 0.6%, narrowly averting recession. The second quarter was more upbeat, leading the DoF to forecast GDP growth of between 0.8% and 1.8% for 2009 and between 2.6% and 3.6% for 2010.

The second-half results were boosted in no small part by a range of stimulus measures, comprising accelerated government spending, tax cuts and public-private sector investments in infrastructure projects. In total, government spending in the first eight months of 2009 grew by 15.5% year on year. However, with headline inflation plummeting to a 32-year low of 0.2% in July 2009, some analysts have suggested that there may be room in the economy for further 'pump-priming', as it is referred to locally. Although Mr Teves expects next year to bring with it a moderate economic recovery, he has not ruled out providing additional stimulus measures. "We can sustain this for as long as we don't go beyond the realm of the boundary that we consider to be fiscal discipline," he says.

Making headway

As is the case for many Western economies, however, the Philippines cannot afford to go on spending. Indeed, balancing the books has proved a decade-long battle for the country at large, which has seen budget deficits in excess of 5% of GDP in previous years. Prior to the onset of the global financial crisis, however, Mr Teves and his team at the DoF were making significant and hard-fought headway toward fiscal consolidation. Buoyed by near-record GDP growth of 7.3% in 2007, it looked as though the country would balance its troublesome budget by 2010.

But the crisis has put an end to this aspiration. The government's stimulus plan, combined with a marked decline in already-meagre revenues, saw the budget deficit balloon dramatically to 237.5bn pesos ($5.08bn) in the nine months to September, up 345% from the figure the previous year. Having been forced to recalibrate the government's fiscal trajectory, Mr Teves projects a deficit of 3.2% of GDP for the year 2009 and 2.8% of GDP for 2010, with fiscal consolidation targeted at 2012/13.

Perhaps not surprisingly, the Philippine government is one of the most active sovereign bond issuers in Asia, with borrowings surging in recent months: January 2009 saw the government float $1.5bn-worth of 10-year bonds, followed in July by a further $750m in 10-year bonds and in mid-October by the government's third issuance this year of $1bn in 25-year dollar-denominated bonds. The finance secretary has also secured official assistance loans from the Asian Development Bank and the Japan International Co-operation Agency to the combined tune of $956m. The DoF is also in the process of negotiating another $250m loan with the International Bank for Reconstruction and Development, the financing arm of the World Bank, to plug the budget gap until next year.

Fortunate position

Throughout the global economic slump, the Philippine government has been able to tap the debt markets with striking ease, reflecting a broader global appetite for emerging market paper: the country's latest October issue was nearly five times oversubscribed. In this regard, says Mr Teves, the Philippines is in a fortunate position relative to other sovereign issuers. "In both cases, we have been fortunate in the sense that the market has received our proposal relatively well," he says. "I was also pleasantly surprised, given the difficulties we have had and the difficulties we have been facing, that the market has been responsive." The country's spread has been tight compared with some neighbouring countries, says Mr Teves, and opportunities remain to tap further liquidity if necessary. "This will be available for as long as we remain a good borrower and we are perceived to be serious in pursuing the reforms that are needed in the Philippines," he says.

But the necessary reforms are both plentiful and challenging. Although the present fiscal hole is moderate compared with the yawning deficits seen earlier in the decade, it is a still a serious concern for analysts, who worry that the government's defective tax system will be incapable of plugging the gap. A slew of recent tax-relief measures combined with a decline in imports have already dented income, with January to August revenues slipping 6.5% year on year. Mr Teves is conscious that it is income rather than debt that requires urgent attention. "The trajectory we're looking at is to reduce the debt-to-GDP ratio, but the crucial factor is really raising revenues," he says.

Tackling taxation

While recent events have served to subdue income, however, it is the deep-set systemic problems relating to revenue collection that must be addressed. It is widely recognised that the triple scourges of tax evasion, smuggling and corruption continue to bleed the economy of vital resources. If the finance secretary could be afforded an 11th commandment to be posted in all the classrooms across the Philippines, he says wryly, it would read: "Thou shalt pay taxes in accordance with your income." But official taxation levels remain too low, say experts. Blesilda Pestano, a partner in the financial services practice at Isla Lipana, a local partner of PricewaterhouseCoopers, says that the country's rate of taxation has reached a plateau of about 14.5% of GDP. To have a meaningful impact on economic growth, however, taxation needs to reach the 18% mark, she says.

The finance ministry is particularly conscious of this, as it comes under growing pressure from the IMF to widen its tax base. Mr Teves is campaigning hard for tax reforms, including the simplification of the net income taxation scheme and revisions to the laws on so-called 'sin taxes'. Even the humble SMS text message is to be subjected to a controversial levy of five centavos, pending further political squabbling. But the timing is unfortunate. The Philippines is entering an election year and tax rises at a time of economic stress are an unlikely vote winner. "Even under normal conditions, taxes are not easy to get approved by Congress," says Mr Teves. "But we have to exert as much [pressure] as we can. You never know, we might be lucky," he says.

There is a growing degree of urgency however. External ratings agencies will require evidence that the government is putting its financial house in order if they are to maintain a stable outlook on the developing economy, say onlookers. According to Mr Teves, the greatest blow to the country's income has been dealt by an onslaught of revenue-eroding reforms that are effectively rolling back tax gains realised through the Reformed Value-Added Tax law, passed in 2005. Mr Teves is campaigning for a moratorium on the passage of those pending measures, which could result in foregone revenues of up to 100bn pesos, he says. "We are hoping that our efforts will yield understanding from members of Congress: all we want is to restore what we have achieved in 2005 and we can take care of the rest."

While acknowledging that the situation is tight, however, Mr Teves says he does not fear a downgrade by the rating agencies. "Based on my personal interaction with them, they perfectly understand the situation that we're in," he says, referring broadly to the complex and often protracted political process. Provided the political will exists to enact reform and a timetable can be scheduled for future revenue improvements, it is likely the rating agencies will take a sympathetic view, say some. As the country's deficit continues to balloon, however, Mr Teves has indicated that he may be forced to sell government assets in order to balance the books.

The situation has not been helped by the country's devastation at the hands of two violent typhoons in late September which caused billions of dollars-worth of destruction. As The Banker went to press, the country was bracing itself for typhoon Lupit, in what is becoming a period of intense uncertainty for the ever-fragile government finances.

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