Strong economy, resurgent peso save the year for GMA

Perhaps the biggest achievement of President Arroyo this year is improving investor confidence by reversing the decades-old trend of fiscal deficits.

Her efforts paid off since it helped her fend incessant political challenges posed by her critics.

Last week, foreign analysts and government economic managers said that while the economy slowed down in the last quarter owing to natural calamities, the government remains on track to achieve a growth of more than five percent and a deficit of around P90-P100 billion, lower than the previously projected P125 billion.

The government is aiming for a 5.5 to 6.1 percent Gross Domestic Product (GDP) growth by yearend.

While the government appeared on track in achieving a balanced budget by 2008 with four monthly surpluses recorded this year, stocks rose to their highest in nearly a decade while the peso reached a six-year high as treasury bill rates fell.

"Definitely her strong suit is the economy," according to Roel Landingin, a former business editor and currently Manila correspondent of the London-based Financial Times.

"Her effort at fiscal consolidation had a major effect on businessmen, the international financial community and creditors; without this, she would have a harder time justifying her being there (in office) and fending off political challenges," he said.

Landingin said Mrs. Arroyo’s achievements in the economy are a hard act to follow and cannot be overshadowed by political attacks.

"So whatever attacks she’s having politically, her fiscal figures are what she throws at them," Landingin said. "Whatever they (detractors) say, the country has a strong fiscal position."

While the rosy economic numbers address a narrow audience, Landingin said "they are very powerful."

"These are stock market people, creditors and investors," he said.

Landingin, though, admitted the effects of her fiscal reforms, which began with imposing new taxes, including the 12 percent value added tax (VAT), have yet to be felt by ordinary Filipinos, especially those in poor provinces.

"That’s why surveys (still) show people considering themselves as hungry or poor despite all these fiscal consolidation," Landingin said.

He said economic gains brought about by fiscal reforms may take time before these are felt by ordinary Filipinos as government agencies have been used to scrimping on spending for decades.

And there is also the issue of absorptive capacity of agencies now with revenues increasing, he said.

The VAT is the centerpiece of the government’s fiscal reform program, which aims to achieve a balanced budget by 2008, or two years ahead of the original 2010 schedule, under the Medium Term Philippine Development Plan.

The Philippines had a budget deficit of P50.4 billion for January to September, lower than the programmed nine-month deficit of P122 billion.

The government under Mrs. Arroyo was able to record budget surpluses in April, May, June, and August.

Dollar remittances rose 37 percent in October compared to the same period last year or to $1.2 billion, bringing the total for the 2006 to $10.3 billion or a 16.6 percent year-on-year rise.

Political improvement, too

In its latest credit outlook for the Asia-Pacific market for 2007, Standard & Poors (S&P) said "the Philippines has achieved considerable improvement in the fiscal and political arenas in 2006, which has led to a revision of the rating outlook to stable from negative."

Following implementation of the 12 percent VAT, S&P said fiscal performance and revenue collection improved notably.  

It said the deficit target of 2.1 percent of GDP is expected to be exceeded although this can be also attributed to the fact that the government cannot spend much as it continues to operate on a re-enacted budget.

"Improved political backdrop has been another significant positive credit factor this year, greatly contributing to favorable investor sentiment," the report said.

"The Arroyo administration has consolidated its position throughout the year, and opposition efforts to unseat her have come to naught," the credit rating agency said.

Landingin added a weak opposition virtually helped Mrs. Arroyo remain in office.

"It is not as if she would be ousted if the economy were bad. Her political foes continue to fumble and the people know that there is no viable alternative to her even if some don’t like her," he said.

Standard and Poors said the better fiscal and political setting, and improved investor sentiment are reflected in the strength of the peso, which appreciated nine percent over the past year.

The peso, the outlook added, is supported by a combination of rising net foreign direct investments, strong remittance flows from overseas Filipino workers as well as buoyant exports.

The rating agency said the strength of Philippine exports and remittances "foreshadows a higher current account and overall balance of payments surplus, improving the country’s already favorable external liquidity position."

S&P said that as improvements in revenues become more entrenched, the government’s focus would be spending, particularly given the years of underspending by government agencies due to lack of funds, and with the coming elections in 2007.

"Political risk from a challenge to the Arroyo presidency should remain low, and the expectation is that the President will serve out her remaining term without facing major upheavals that paralyze major policy-making or seriously affect investor sentiment," S&P said.