2007/11/26

The Business of Governance

Leonor Magtolis Briones
Business Mirror, Philippines

The death by suicide of a twelve-year old girl from Davao due to extreme poverty has touched the collective conscience of the country. People of consequence, from the President down to bureaucrats, social anthropologists, civil society organizations, and media personalities have endeavored to explain why a child would commit suicide.

For a young girl, twelve years is a time of magic and dreaming. It is the magical time of transition from childhood to womanhood, from fifth grade to sixth grade. It is the time for dreaming of parties, of clothes, and yes of boys.

When a girl is twelve years old, she should not be scrounging for fare, baon, and funds for school projects. She should be sighing over her crushes, shopping for geegaws and dreaming of going on to high school and college.

What were the items in the child’s wish list? A bicycle, a bag and a pair of new shoes. Well-off twelve year olds have closets overflowing with bags and shoes. They can ask for a bicycle any time. A poor child literally gave up her life because she could not have them.

People commit suicide out of despair and frustration. In a country which adores and worships children, even one child driven to self-destruction is an indictment on our economy and society.

For years, civil society organizations like Social Watch Philippines have been challenging official statistics about poverty. They produced tons of literature, power point presentations and statistical tables. They have engaged the government in public debates.

However, it took one child, one statistic to prove in the most brutal and stark terms that poverty does exist. Anti-poverty activists say that poverty has the face of a woman. In the Philippines, poverty has the face of a desperate, despondent child.

The 2008 budget and macroeconomic assumptions

The P1,227 trillion 2008 budget is currently under consideration by the Senate. Things have changed since Congress approved it last October.

The proposals are based on macroeconomic assumptions of what will happen next year. Changes in these assumptions will, of course, impact on the 2008 budget.

Take the projected debt service for interest expense. It is calculated at P295.751 billion. This does not include principal payments. There have been significant movements in the exchange rate. The strengthening of the peso and the subsequent lowering of the exchange rate will of course reduce the debt service. This is because less pesos will be needed to pay interest on the foreign debt.

However, we need to be reminded that if the peso continues to grow stronger, it will mean lower revenues from imported goods. Again, this is because the peso equivalent of imported goods will go down. Therefore, taxes on imported goods will correspondingly go down. Lesser revenue will translate into less funds available for payment of the debt service.

At the same time, the debt service will also be affected by movements in interest rates. If these go up, then the interest expense will also go up.

Still another important consideration in the macroeconomic assumptions is the price of oil. The 2008 budget is premised on oil prices at $62 to $70 per barrel. Last Wednesday, it shot up to $97 per barrel. At the rate it is going, it will not be long before it hits $100! Obviously, oil prices will impact not only on government expenditures which use up a great deal of oil, but also on revenues because of oil taxes.

At present, there is already pressure to cut or even eliminate petroleum taxes. When this happens, government revenues will surely go down.

How about dividends from Bangko Sentral? One of the major sources of government revenues is dividends from government owned and controlled corporations and financial institutions. They are required by law to remit 50% of their net income to the government. The BSP is one of the largest contributors of dividends to government coffers.

Currently, projections show that the BSP might suffer a deficit in 2007. government revenues for 2008 will certainly be negatively affected. This is because BSP has been suffering from huge foreign exchange losses in its effort to stabilize the exchange rate of the peso.

If BSP losses continue, recapitalization might be required. And where will the funds come from? From the national government of course!

Whither the macroeconomic assumptions? At the rate the macroeconomy is going, the proposed 2008 budget might be based on less than realistic macroeconomic assumptions. The task of the government at present is to prepare a series of sensitivity analyses on the possible impacts of the exchange rate, interest rate, oil prices, and even balance of trade on the proposed 2008 budget—debt service, government expenditures and revenues. Unless this is done, the government runs the risk of implementing a budget premised on a balanced budget. It might turn out to be a big fat deficit.

As usual.

(Ms. Leonor Briones is a former National Treasurer of the Republic of the Philippines. She is currently teaching at the University of the Philippines' National College of Public Administration and Governance. She is also a co-convenor of Social Watch Philippines. She also writes a column for the BusinessMirror)

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