All eyes on the Supreme Court

Investors are keenly awaiting the ruling of the Supreme Court (SC) regarding the TRO on EVAT bill in July. We have repeatedly mentioned in previous articles that the run-up in the Philippine stock market is basically a macro call – hinged on the successful implementation of economic and fiscal reforms.

Looking back, the Phisix was below 1,600 when President Arroyo unveiled the fiscal roadmap. The first of these reforms was the Napocor rate hike – aimed to control the consolidated public sector deficit. The immediate impact was positive for the market propelling the Phisix towards 1,800. This was followed by the SC ruling on the mining act and the passage of the Sin Tax & Lateral Attrition bills which pushed the Phisix further past 2,000.

The failure to pass the EVAT bill early in March caused the market to freefall by more than 300 points during the March to April period. The political bickering that followed (jueteng, Gloria-gate scandal, impeachment/resignation calls, etc.) caused the market to trade wildly afterwards.

But more than the scandals, the biggest hit that caused the market to go down is the Supreme Court’s TRO on VAT. This single act triggered a 4.2-percent plunge in the Phisix in just one day – a drop not seen since the 1997 Asian financial crisis.

If not for the TRO on EVAT and political noise, we believe the stock market should be 20 percent higher and the P/$ rate at 54.

The Supreme Court is expected to decide anytime soon. We hope that the TRO on EVAT will be lifted as this should be positive for the financial markets. Any weakening of the EVAT bill such as the lowering of the 12-percent VAT rate back to 10 percent will be viewed as negative by foreign investors, multilateral institutions, credit rating agencies and big business. Likewise, the reinstatement of VAT exemptions is negative for the markets. However, the retention of the 32-percent corporate income tax from the proposed 35 percent is neutral to positive for the markets.

Further delays in its implementation will have financial consequences:

decline in stock and bond prices,

rise in interest rates,

further peso depreciation,

possible credit downgrades,

delays in the major privatizations,

postponement of planned IPOs,

deferment of government road show to refinance debts.

WARNING: Indonesia – last year’s best performing Asian stock market – is now suffering. Stocks are down 11.3 percent this month. Its currency, the rupiah, has depreciated by 10.9 percent year-to-date against the US dollar.

WHY? Because it subsidized fuel. Although politically popular, these subsidies distort market prices and are not economically efficient. Indonesia used to be a net exporter of oil but is now a net importer. The country’s surging demand for dollars to fund its oil imports and the impact of the fuel subsidies on its budget deficit have caused panic in its financial markets.

We must learn from this lesson. Let us not forget what happened in 1997, when contagion spread from one Asian country to another. Now, more than ever, we need to push through with the fiscal reforms and curb the budget deficit. The gains from these reforms will not only encourage investments but also provide better cushion to external shocks such as this global oil crisis.

We therefore urge the Supreme Court to uphold the EVAT bill soon and the Congress to stay the course of reforms.

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