Sleepless in RP

Commentary: Arroyo's troubles leave investors sleepless in Manila

By Andy Mukherjee Bloomberg News

President Gloria Macapagal Arroyo of the Philippines has explained how she beats the stress of what must be Asia's most embattled political job: by praying and then going to sleep.

 

"When I'm in my room, I lie down and I pray a lot, then I fall asleep," the 58-year-old leader is quoted as saying in Time magazine's July 4 Asian edition. "I do that all the time," said Arroyo, "usually at 3.30 p.m., after Mass."

 

Unlike the president, investors in the Philippines are a sleepless lot these days, though they too are saying their own prayer, and it's for Arroyo's political survival.

 

Arroyo, whose family members are being investigated by the antigraft prosecutor on charges that they had received payoffs from illegal gambling operators, this week apologized for talking on the phone to an election commissioner during the presidential vote count.

 

The opposition claims the taped conversation proves Arroyo cheated in the May 2004 poll to defeat her opponents, including the popular action-movie hero Fernando Poe Jr., who died late last year without conceding defeat.

 

While acknowledging a "lapse in judgment" in her June 27 television broadcast, Arroyo denied that her action had influenced the election's outcome. The difference between what Arroyo is accused of and what she has admitted to holds the key to investors' decisions on whether to stay in the Philippines.

 

The audio recording of the conversation, multiple versions of which are in circulation, does not prove the opposition's case that Arroyo tried to influence the vote, Standard & Poor's said Tuesday in a statement.

 

While the wiretap scandal has spooked investors and provided fodder for Internet chat rooms, it hasn't worked very well on the streets. The "e-power" of the recording that is being traded on the Internet has failed to match the zeal of the "People Power" movement, which toppled President Ferdinand Marcos in 1986.

 

Nor did anti-Arroyo demonstrations this month produce anywhere near the level of excitement of January 2001 when President Joseph Estrada was under popular pressure to resign following allegations of corruption.

 

In the absence of proof that she cheated to keep the top job until 2010, Filipino voters may be willing to "close this chapter" as Arroyo has urged them.

 

Investors, too, would be glad if the scandal just went away. That would allow them to focus on recent improvements in the debt-ridden country's chronic budget deficit.

 

The government posted a budget surplus of 3.3 billion pesos, or $59 million, in April, marking the first time in four years that revenue exceeded spending. Fiscal correction will gather speed as a value-added tax, or VAT, is introduced next year. VAT will improve the country's junk-bond debt rating and help push up bond prices.

 

"Unless real evidence of vote manipulation on a broad scale emerges in the coming weeks," Scott Wilson, executive director of investment research at UBS in Singapore, wrote in a note, "Arroyo's congressional support is likely to remain firm."

 

Wilson is maintaining his "buy" rating on Philippine bonds.

 

In the first five months of this year, tax collections were a fifth of a percentage point higher at 5.2 percent of gross domestic product, the first increase in eight years, according to UBS.

 

Fitch Ratings last month changed its outlook on Philippine debt to stable from negative, citing "significant fiscal measures," for which credit must go to Arroyo, who countered political opposition to push a law that will increase the value-added tax rate to 12 percent from 10 percent starting January 2006.

 

The increased rate, along with fewer VAT exemptions, is expected to lift revenue in 2006 by about 104 billion pesos.

 

Arroyo's administration also won praise last week from the International Monetary Fund, which hailed it for its "courageous campaign" against tax evaders.

 

Standard & Poor's said Tuesday that Arroyo's apology was unlikely to affect the country's foreign-currency rating of BB-, three levels below investment grade.

 

"Over the long term, however, the possibility of a president weakened by diminished public support and an obstructive legislature could heighten political instability," said an S&P analyst, Agost Benard. "That might further impede the administration's efforts to put public finances on an even keel."

 

Public debt exceeds the Philippines' gross domestic product of $85 billion.

 

A weak Arroyo would be more acceptable to investors than the chaos that might occur if she were ousted.

 

If Arroyo is impeached or forced to quit, Vice President Noli de Castro will replace her, pending new elections.

 

The vice president enjoys mass appeal, though "he has limited support from the business community and the elite," Credit Suisse First Boston's regional economist, Sailesh Jha, wrote in a research note last week.

 

Investor sentiment is crucial for the Philippines to stem the decline in the peso, which has fallen 2.4 percent against the U.S. dollar in the past month, more than any other Asian currency.

 

A weak currency increases the cost of debt payment - the government's net overseas borrowings equal 48 percent of the country's annual current account receipts.

 

With so much riding on Arroyo's ability to survive the political crisis and stay focused on the economy, investors hope the president is alert - and awake.