Peso may weaken if Congress fails to pass VAT bill

After slowly picking up strength over the past few weeks, monetary officials said the peso could still fall again against the dollar depending on whether Congress will be able to pass a new law on value added (VAT) tax.

The Bangko Sentral ng Pilipinas (BSP) said investors are closely watching the on-going deliberations in both houses of Congress since it would spell the difference in the government’s deficit and debt reduction program.

"If the VAT adjustment does not happen, the peso will fall again," said BSP Governor Rafael B. Buenaventura.

"The reason we are getting all this attention now is because of the initial public offerings in the market and the improvements in our prospects," he added.

The growing optimism about Philippine prospects, according to Buenaventura still hangs in the balance between what has already been achieved by the Arroyo administration and the reforms that still have to be accomplished.

Buenaventura said banks are also taking initiatives to smoothen the volatility in the peso-dollar exchange rate, reducing their short positions slowly ahead of the long holiday during the Holy Week.

"I’m sure there is some short-selling on the part of banks and they are reducing it slowly or the market will not be able to absorb it," Buenaventura explained.

Over the short-term, Buenaventura said the developments in Congress would be critical in terms of sustaining the inflow of investments into the country.

"The VAT adjustment is critical in generating enough revenues to reduce the deficit and reduce the need for more borrowing," he said. "Ultimately, the concern is to reduce the debt and increase capital expenditures to support economic growth. If we can’t do that, investors will not be able to expect growth."

According to Finance Secretary Cesar V. Purisima, on the other hand, the Department of Finance is still hoping for Congress to pass the VAT adjustment before the recess.

"To us, the earlier the better," Purisima said. "The best scenario, of course, is for Congress to approve a single-rate increase in the VAT rate and remove some of the exemptions."

Purisima said the Arroyo administration is pushing for as much revenue increase as possible to be able to free significant portions of the national budget for development spending.

"Our bottom line is to be able to resume spending on development," he said. "Otherwise, we will have to stick to a bare-bones budget and over the long term, our growth will be affected."

The adjustment of the VAT from 10 percent to 12 percent was expected to generate at least P60 billion more revenues for the government on a sustained basis.

According to Purisima, the government would be able to generate some funds if it would be successful in divesting of some prime assets but he said such revenues would be non-recurring.

"We want a steady increase in revenue because of the simple fact that the increase in our budget is also steady," he said.