High oil prices to widen RP trade deficit — UBS

The country’s trade deficit is expected to widen further if oil prices remain at their current high levels, an international investment research firm said.

In its latest Philippine Economic Update, UBS Investment said if oil prices stay at current levels, "we believe there will be more pressure on the peso and on interest rates, though to much a lesser extent than we have seen in Indonesia or even in Thailand."

"We believe the strong trade balance for most of the first half of 2005 was due to import compression and de-stocking. This is not sustainable and we expect the import bill to increase from here,"UBS Investment said.

It also noted that the $653 million trade deficit in June is probably a good indicator of things to come.

The UBS report also warned that capital inflows are at risk if the Supreme Court will rule against the freeze of the expanded value-added tax (EVAT) law or if it delays a decision much longer.

The High Tribunal is expected to decide on the EVAT case any time soon. For every month of delay in the implementation of the EVAT law results in a foregone revenue of P5 billion for the government’s coffers, UBS said.

ATR-Kim Eng Securities Inc., on the other hand, said a decision to lift the injunction on EVAT would be a market-friendly outcome as it would provide a structurally sound tool with which to address the country’s most serious economic issue –fiscal stability.

The opposite outcome, ATR-Kim said, would, meanwhile, leave the Arroyo administration scrambling for other revenue measures to contain the budget deficit.

"Given the political divide in Congress, the prospect of passing other revenue bills in Congress is dim at this point. That would leave the less palatable alternatives of issuing stop-gap administrative orders to lift tax revenues or increasing privatization proceeds, both of which are non-recurring, episodic and do nothing to address the structural defects of the fiscal situation," it said.

ATR-Kim Eng further noted that the P1.05-trillion national budget President Arroyo submitted last week to Congress, which incorporates a 14.7-percent increase in expenditures, is premised on the implementation of the EVAT.

But ATR-Kim Eng said should the Supreme Court lift the restraining order on EVAT, its implementation will be complicated by the record levels being reached by oil prices.

However, the firm said the Philippine economy, to date, "has been resilient in the face of higher prices, with gross domestic product (GDP) growth in the first half at 4.7 percent and the second half corporate reporting season culminating for us in a net upgrade of earnings."