Philippines: from two step to cha cha

President Arroyo has managed to side step impeachment and won a victory for the VAT, is now the time for a new Prime Minister?

It looks as though there may be some light peaking out at the end of the tunnel for Philippine President Gloria Arroyo. Shortly after staving off three impeachment bids yesterday (Thursday), the Supreme Court ruled 15-0 to uphold the constitutionality of the Extended Value Added Tax (E-Vat).

The tax initiative, suspended June 1, will remain under the temporary restraining order until the ruling becomes final. The opposition now has 15 days to file any appeals, although none are likely.

The law is an integral point in Arroyo's design to address the country's perpetual deficit. Since its suspension the major international rating agencies have put the country on credit watch, while the majority of the region's major investment banks have reduced the Philippines from market weight or above to underweight. Although in recent weeks many had returned their outlook to market weight.

For all the good news, many are viewing the removal of the moratorium as a double-edged sword for Arroyo in that it can only add to the hostility and resentment that the public already feels towards her and her government. Currently suffering from almost record low approval numbers following her much publicized scandals, the increased tax will not endear her to a citizenry already indignant over high oil prices. Almost certainly her opponents will use this as a rallying point following today's set back in Congress.

The E-Vat will earn the government an estimated Ps80 billion ($1.45 billion) each year by removing the exemption on power, petroleum products and transport increasing their effective price by 10%. Goods and services, already subject to the VAT, will be taxed an additional 2% from the present 10%. The law also raises the corporate tax level from 32% to 35%. However, the corporate tax is only effective for three years and will subsequently be reduced to 30%.

News that the political turbulence faced by the Arroyo administration may be at an end could not come at a better time for the Philippine economy. Which has been much maligned in recent months with consumer confidence battered by rising oil, education and transport costs. Indeed, many economists do not expect consumer spending to be the driver of growth it has been for the previous four years.

While foreign domestic investment has slowed considerably over the previous five months.

Although there is much optimism that the fourth quarter will see an acceleration of growth in sectors such as agriculture, exports, remittances from overseas foreign workers and an up tick in domestic investment, GDP is still expected to slow to 4.8%, lagging behind its East Asian neighbors.

The Philippines is targeting a budget deficit of around Ps180 billion this year - 3.4% of estimated GDP, however that is based on an oil price projection of $35 a barrel. With New York oil contracts now at a staggering $70 per barrel that price tag is expected to double to around $10 billion for this year alone.

Despite yesterday's double victory over her opposition, Arroyo still faces a crisis of credibility. Without adequately addressing this, the government will continue to be handcuffed in its effort to raise GDP growth to the proposed 7% goal it set at the beginning of Arroyo's term. For many observers the most likely solution to this problem is a fundamental charter change. Moving to a parliamentary government.

This would hand Arroyo an opportunity to step aside gracefully, while at the same time and perhaps much more importantly, helping to restore investor confidence both foreign and domestic.

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