‘Investors won’t welcome suspension of EVAT’

Southeast Asia’s largest bank warned yesterday that the international financial community would react negatively to any move to suspend the implementation of the expanded value-added tax (EVAT) on power and oil by the Philippine government.

In its client report dated Sept. 20, the Singapore-based DBS Group said they expect interest rates to go up once President Arroyo supports snowballing moves in the Senate and the House of Representatives to postpone the implementation of the VAT Reform Law on power and oil to June next year.

"Politicians in the Philippines are worried over the outlook of domestic prices and President Arroyo is likely to honor a resolution to delay the imposition of EVAT on fuel and electricity till June 2006," the DBS report said.

"While this could keep prices stable, it would be frowned upon by investors and credit ratings agencies. As such, we have decided to initiate a bear steepener on the curve, targeting 260 bps (basis points)," it said.

The oil and power sectors were previously VAT-exempt.

The report came on the heels of Mrs. Arroyo’s statement in a one-on-one interview with STAR publisher and chairman Max Soliven that she would accept whatever decision Congress would make on the resolution to suspend the VAT implementation on the two critical sectors.

She admitted that the international finance and investor community reacted negatively when the Supreme Court issued a temporary restraining order on the new tax law last July. The SC, however, later declared the VAT Reform Law constitutional but deferred the lifting of the TRO for two to three weeks.

"That may also be the same reaction but the Supreme Court eventually ruled in favor of the law so the world reaction was premature. So, I think it’s good for us to trust the institutions," the President had said.

According to its published profile, DBS is one of the largest financial services groups in Asia. It is the largest bank in Singapore and the fifth largest banking group in Hong Kong in terms of assets. DBS has leading positions in consumer banking, treasury and markets, asset management, securities brokerage, equity and debt fund raising. Beyond the anchor markets of Singapore and Hong Kong, DBS serves corporate, institutional and retail customers in Thailand, Malaysia, Indonesia, India and the Philippines.

In China, the bank has branches and representative offices in Shanghai, Beijing, Guangzhou, Shenzhen, Fuzhou, Tianjin and Dongguan. The Bank’s credit ratings are among the highest of banks operating in the Asia-Pacific region and the highest among banks in Singapore.

The EVAT is the centerpiece of the Arroyo administration’s menu of fiscal measures to reduce the deficit and balance the budget by 2010. It is expected to generate at least P80 billion in revenues next year.

The delays in the ratification of the VAT Reform Law led to some downgrades in the Philippines’ credit ratings in late 2004 and early this year. But following its enactment into law, the country credit ratings were upgraded.

Finance Secretary Margarito Teves earlier warned that delays in the implementation of the law would result in higher interest rates and more expensive Philippine debt papers.

However, Albay Rep. Joey Salceda, chairman of the House economic affairs committee, warned that imposing VAT on oil and power would seriously dampen consumer confidence due to high prices could lead to more revenue losses for the government.

Salceda, who spearheaded moves in Congress to defer the VAT on the two sectors, said pushing through with the tax would bring the country to an Argentina-like financial crisis. — With Ding Cervantes