RVAT goes up to 12%
Perfect Conditions At the beginning of the year, the government was closely monitoring two conditions that would trigger the increase in the reformed value-added tax rate from 10% to 12%. First, the fiscal deficit-to-GDP ratio had to be at least 1.5% and the VAT collection-to-GDP ratio at least 2.8%.
| Triggers |
| RVAT increase from 10% to 12% was pegged on the following conditions: |
| 2005 fiscal deficit-to-GDP ratio |
1.50% |
| 2005 VAT collection-to-GDP ratio |
2.80% |
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| 2005 Figures |
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| Fiscal deficit-to-GDP ratio |
2.70% |
| VAT collection-to-GDP ratio |
2.90% |
| GDP |
P5.4 trillion |
| VAT collection |
P156.8 billion |
| Fiscal deficit |
P146.5 billion |
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In end-January, Finance Secretary Margarito Teves officially announced that these conditions had been satisfied (2.7% and 2.9%, respectively) and that he was therefore recommending the RVAT increase, which President Gloria Macapagal-Arroyo immediately implemented on 1 February. Secretary Teves says that the national government expects to raise P75 billion this year from the RVAT to help reduce the national government’s fiscal deficit. According to the Department of Budget and Management, 30% of RVAT collection will be spent on infrastructure projects, while the remaining 70% will finance the fiscal deficit. On the effectivity date of the increased RVAT on 1 February, the peso-dollar rate closed at a two-and-a-half-year high of P52.09/US$ at the Philippine Dealing System, reflecting the positive sentiments of foreign investors on the RVAT hike. International credit rating agencies Standard and Poor’s and Fitch Ratings both raised their rating outlooks on Philippine sovereign debt to stable from negative last 10 and 13 February, respectively.
Meanwhile, the country’s economic managers asked consumers to air their grievances on the RVAT before their agencies instead of marching in the streets. In Manila, police dispersed a rally against the RVAT hike. Gasoline pump prices rose by an average of 65 centavos per liter. The cost of electricity also increased by 10 centavos per kilowatt-hour of electricity. While appealing to the people to “bite the bullet,” the government promised to go after profiteers, smugglers, and tax evaders. The Department of Trade and Industry has been tasked to monitor prices of basic commodities and to prosecute unscrupulous traders who will take advantage of the tax hike. The Department of Energy said the rise in the RVAT will be mitigated by the reduction or removal of excise taxes on a range of petroleum products. For its part, the Department of Agriculture pledged to implement reforms to bring down costs and improve the efficiency of the supply chain in the agricultural sector. Some economists expect a slowdown in consumer spending in the first half of the year, which could hurt economic growth. Consumption makes up 70% of the country’s GDP. 
| Signals |
 The revised leading economic indicator index rose to 0.155 in the first quarter of 2006 from 0.078 in the fourth quarter of 2005.
Preliminary revenue collections by the Bureau of Internal Revenue grew by 15.4% to P48.5 billion in January. Likewise, collections by the Bureau of Customs jumped by 17.1% to P12.4 billion during the month.
 Inflows of foreign portfolio investments reached only US$537.9 million in the first two weeks of February from US$1.0 billion a year ago. On the other hand, outflows rose to US$407.1 million from US$287.3 million a year ago. These resulted in net foreign portfolio investments thinning to US$130.8 million as of the first two weeks of February from US$740.1 million a year ago.
The country’s gross international reserves reached an all-time high of US$20.5 billion in end-January, a level equivalent to 4.3 months’ worth of imports of goods and payments of services and income. The Bangko Sentral attributes the increase to the proceeds from the national government’s flotation of the RP Global Bond and Euro Bond as well as to the Bangko Sentral’s income from investments abroad.
Headline inflation rate rose to 6.7% in January from 6.6% in December 2005. The Bangko Sentral ng Pilipinas had earlier estimated that inflation in January would be within 6.4%–7.1%, while NEDA had forecasted 6.0%–6.3%.
The pace of commercial bank lending growth slowed down to 0.9% in end-December 2005 from 2.1% in end-November 2005. Higher fuel and production input costs reduced credit demand, especially from the following sectors: wholesale and retail trade; electricity, gas, and water; manufacturing, transportation, storage, and communication; and construction.
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