Inflation, interest rates may spur new problems for GMA, says Bear Stearns

The prospects of rising inflation and interest rates could spur a new round of political problems for President Arroyo, a US-based investment research firm said.

In its weekly Emerging Markets Sovereign Journal, Bear Stearns said this scenario is likely "as a growing number of Congressmen, including some of her (President Arroyo) own supporters who recently voted against impeaching her, are calling for a postponement of implementation for the expanded value added tax (EVAT) law until inflation comes off of its current high," the firm said.

According to the firm, the implementation of the EVAT law in October may push inflation up to 7.5 percent to eight percent compared with the 7.2-percent inflation figure recorded in August.

It also took note of the Bangko Sentral ng Pilipinas (BSP) possible move to raise its key policy rate. Aside from the overnight rate, the BSP could also increase the reserve requirements imposed on banks to curb inflationary pressures.

"In the meantime, the central bank is talking about another hike in its overnight borrowing rate, which has remain unchanged since it was last raised to seven percent on April 7," it said.

A local equities firm, on the other hand, said the Supreme Court would likely uphold its decision on the constitutionality of the EVAT law.

"The motions for reconsideration do not seem to raise new issues against the EVAT law and, in our view, is unlikely to change the Court’s earlier decision, which incidentally was a unanimous one,"Philippine Equity Partners Inc. (PEPI) said, in its latest market review.

PEPI warned that the uncertainties on EVAT will keep the government’s fiscal position hanging.

"In any case, the Court will take two-three more weeks to issue a final ruling — a delay that simply undermines confidence in the ability of the government to implement vital reform measures.

Members of the opposition in Congress and local petroleum dealers filed separate motions asking the Supreme Court to reconsider its Sept. 2 decision declaring the EVAT law constitutional.

The government expects to beat comfortably its official deficit target of P180 billion for 2005, or 3.4 percent of GDP, after a decifit last year of P187 billion.