EVAT to reduce NG borrowing needs by 31%

The National Government’s net financing requirement is expected to go down by 31 percent to P150 billion in 2006, from P216 billion in 2005 if the expanded value-added tax (EVAT) will be implemented, a ranking government official said.

Finance undersecretary Gil Beltran said the government will have to lower its financing requirement because of the proceeds that would be realized from the new tax law.

"Our borrowings will be cut due to the drop in the budget deficit if new VAT law is implemented," Beltran said.

For 2006, the government is expected to borrow P102.4 billion from foreign sources and P47.6 billion from domestic market.

Based on a recent ING Bank study, the lower net financing in 2006 is overall positive for bonds.

The lower net debt issuance of government is based on NG’s budget deficit target of P124.9 billion, 2.1 percent of gross domestic product (GDP).

"Even with possible slippage, we currently expect a NG deficit of P144 billion or 2.4 percent of GDP in 2006," ING said.

ING said it is optimistic that the EVAT will be implemented within the year.  "The basic assumption is that the tax reform package would be implemented. If there are changes with the package, we would expect government to come out with other measures such as less controversial rationalization of fiscal incentives and simplified net income tax for entrepreneurs or small business," it said.

The investment bank noted that government’s resolve to implement the tax reform package and achieve its revenue goals would be important.

"Riding on such achievement would be ratings upgrade. S & P, Fitch and Moody’s continue to look for evidence of not only of unwavering resolve to implement VAT especially the VAT rate hike to 12 percent from 10 percent but also to further cut fiscal deficits.  In our view, government would implement the VAT in full," it said.

It added that "short of this would see some adjustments in fiscal deficit expectations but should not alter significantly the direction of fiscal improvement-that of a balance budget by the end of this decade."