Foreign Exchange
Strong Start

Thanks to a weak dollar and strong inflows of portfolio investments, the Philippine peso has been the region's best performing currency early in 2005, appreciating 2.8% in mid-February since 1 January.

In the first three weeks of January, net portfolio investments reached US$427.2 million, compared to US$12.9 million a year ago. Among the factors that have attracted portfolio investments were the removal of the country from the money-laundering blacklist, the retention of the Philippines in the CALPERS portfolio, and the Supreme Court decision allowing foreign companies to enter into mining contracts. Consequently, the Philippine stock market is bullish, becoming the region's best performer in January. The Phisix posted five-year highs in the first two weeks of February.

With net portfolio investments projected to triple to US$2 billion in 2005 from US$661 million in 2004, some expect the peso to climb to P53.50/US$, or even reach P52.00/US$. This trend will ease inflation, but could cut income from exports. Exporters generate lower revenues in peso terms from an appreciating peso-dollar exchange rate.

Philippine rating downgraded
Moody's Sour Mood

On 16 February, Moody's Investor's Service unexpectedly downgraded the foreign currency sovereign debt ratings of the Philippines by two notches to B1 (four notches below investment grade) from Ba2. The outlook remains stable, though. Both the Phisix and the peso plunged 0.6% as a reaction while prices of long-term Philippine bonds traded lower.

In explaining the downgrade, Moody's said that it expects "public sector borrowing requirements will remain large even with more progress in fiscal reform, leaving the Philippines vulnerable to economic, financial, and political shocks, as well as to sudden changes in market sentiment." Moody's noted that the public debt stands at 110% of GDP and the government spends 40% of revenues on interest payments.

On the Valentine's Day bombings in the cities of Makati, Davao, and General Santos, Moody's commented “ongoing political and social unrest also undermines efforts to re-establish confidence.”

Standard and Poor's also downgraded the Philippines one notch last January.

Tax measures
Slow Motion

Of the eight tax measures proposed by President Arroyo to generate P80 billion in fresh revenues, only two have been enacted into law. Three remain pending in the Senate, and three more remain pending in the House Ways and Means Committee.

President Arroyo signed RA 9334 into law raising excise taxes on tobacco and alcoholic products on 21 December 2004 and RA 9335 instituting a lateral attrition system in the Bureau of Internal Revenue and the Bureau of Customs a month after, on 25 January. These two measures are expected to generate P19 billion to P24 billion in income for the government.

The Attrition Act seeks to improve tax collection efficiency by instituting a reward-and-punishment system in the government's top two revenue-generating agencies and will cover employees with at least six months of service. Rewards will be sourced from collections in excess of the BIR's and BOCs revenue targets and will be known as the Rewards and Incentives Fund (RIF). On the other hand, the punishment for underperforming employees is dismisal, which is “immediately executory” when the shortfall is at least 7.5% of the revenue target.

Meanwhile, the House of Representatives has passed on third reading HB 2933 declaring a tax amnesty, HB 3295 rationalizing fiscal incentives, and HB 3555 raising the rate of value added tax to 12%. All three remain pending in the Senate Ways and Means Committee.

A franchise tax bill on telecommunication companies, a new excise tax on petroleum products, and a bill shifting to a gross income tax system for corporations are all still pending in the House Ways and Means committee.

As an added revenue-enhancement measure, President Arroyo issued Executive Order 399 on 17 January 2005 directing the Bureau of Internal Revenue to implement a five-year No Audit Program to promote voluntary tax compliance.