Delay in implementation of EVAT worries int’l investors

The international business community and a number of credit rating agencies have expressed concern over the delay in the implementation of the expanded value-added tax (EVAT) which could lead to possible retrenchment of capital flows and heightened financial volatility, a ranking government official said over the weeekend.

In a press briefing, Investment Relations Office (IRO) executive director Renato Pizzaro, who joined the economic managers in their three-week meetings with investors and CRAs in New York, London and Washington, said the delay in EVAT implementation and the possible deferment in the VAT on oil and power is one of the major concerns of these groups.

"Investors and CRAs indicated that the further delays in the VAT implementation will be unfortunate and will be negatively received and thus may lead to compression of investor confidence which may result to retrenchment of capital flows and heightened volatility; and unfavorable credit rating action which puts out credit position at risk, raises our borrowing costs and displaces fiscal consolidation," Pizzaro said.

Specifically, he said the rating agencies and investors are wary over the contribution of EVAT in the government’s ability to achieve fiscal targets in 2006 and beyond.

"While the Supreme Court decision on the constitutionality of the EVAT was viewed positively, the recent moves in Congress to try to defer the provision in the EVAT law for the elimination of VAT exemptions on power and fuel appear to cloud market sentiment," he said.

The economic managers have met with Credit Suisse First Boston, JP Morgan, HSBC, Citigroup, Merrill Lynch clients and credit rating agencies, Standard and Poor’s and Fitch.

Pizzaro also said the CRAs and investors have noted the measures implemented by the government to mitigate the impact of higher energy prices but "it was clear that addressing the fiscal problem cannot be delayed until such time when reduction in oil prices will occur."

During the meetings, he said investment developments and prospects in priority growth sectors have been noted, particularly in mining, information and communication technology and business process outsourcing.

"Strategies to improve the investment climate, including strengthening of partnership with the private sector, jumpstarting key infrastructure projects and rationalizing the incentives system were likewise elaborated," Pizzaro said.

On the monetary policy, he said discussions were centered on the inflationary impact of rising oil prices and the policy response to stave off inflation risks and manage inflationary expectations.

"Considerations for raising policy rates in a situation of narrowing interest rate differentials, potential second-round effects of oil price increases and high liquidity have been noted," he said.

He said the CRAs and investors shared the same optimism of the National Government of meeting its budget deficit target for the year.

"Progress made on fiscal consolidation has been noted which raises the likelihood that the baseline deficit target of P180 billion for the year will be met, if not exceeded," Pizzaro said.

But he said the investor confidence in the short and medium-term rests absolutely on the full implementation of the EVAT.

According to Pizzaro, the Philippine economic team has assured that the government remains firmly committed to the full implementation of the EVAT.

"Tax administration improvements, continuing efforts to prevent deterioration in government-owned and controlled corporation (GOCC) finances and pursue privatization of the power sector have been noted as important to deficit reduction goals but investor preference for the preservation of the integrity of the EVAT law and its full implementation rather than the deferment of VAT on power and fuel was clear as having more sustainable and long-term benefits to fiscal stability," Pizzaro said.