THERE ARE three things on Congress’ plate now that we are keenly following, given their crucial role in keeping confidence and economic growth up in the very short term as well as over the longer haul.
The more immediate one is the President’s request for emergency powers to address a forecast shortage in electricity supply in the Luzon grid next summer. There is some urgency to this and we expect a favorable joint resolution from Congress, likely within the month. However, the burning issue is not whether or not emergency powers will be granted but what those powers will be.
There is now a tug of war between private players and the Energy department over the best option for filling the forecast 600 MW deficit. The private players believe that a well-managed Interruptible Load Program (ILP) that aggregates private companies’ self-generating capacities, together with energy conservation measures and more prudent plant management (including plant rehabilitation and scheduling of maintenance shutdowns), will be enough to close the gap.
So far, commitments to the ILP are less than 150 MW, about a 10th of available capacity, but the business sector is hopeful that with government providing the proper incentive framework, more will sign up. Overall, the main attraction of this packaged option is that government’s role is less heavy-handed and the ILP kicks in only at particular points in time, thus keeping added costs to a minimum.
While the Energy Secretary openly recognizes the value of these measures, he appears less confident that the ILP can produce the needed volume, and he prefers that the government contracted additional capacity to guarantee adequate supply. The fear among private players is that the government may end up with costly, extended contracts that not only burden taxpayers and/or end-users with needlessly high power bills, but which, beyond the critical summer months, will serve as government-owned reserve capacity that can be sold into the spot market, contravening the intent of the Electric Power Industry Reform Act (EPIRA). Several lawmakers have publicly expressed reservations about the government’s preferred option, also citing cost considerations.
Our best case here is a well-studied, time-bound resolution, clearly defining the parameters of the authority granted to the Executive that leaves little room for perceptions of abuse of powers to arise. Additionally, the resolution needs to be accompanied by clearer policy directions from the Energy Department and its regulatory arm that turn around perceptions of non-market-based price setting. This will help preserve private players’ confidence in the EPIRA, ensure that this episode is seen as a one-off case, and make needed private investments in additional generating capacity happen.
Second on our list is the Bangsamoro Basic Law (BBL), which we have tagged as a medium-term game changer on security and economic grounds. Although the Senate President is looking to pass the law in the first quarter next year, the best case here is passage by end of this year. This will give ample time for expected challenges to be resolved so that elections in the new autonomous region can be held within this administration’s term. It is also essential that the approved legislation is seen as preserving the terms that the Executive agreed with the Moro Islamic Liberation Front (MILF), which were the product of a long struggle and negotiation for peace. The short-term goal is to allow the current, more pragmatic MILF leadership to secure early wins and broaden support for the peace agreement in order to fend off the younger fundamentalist faction demanding greater autonomy. Over time, peace and security will help unlock Mindanao’s potentials. The island is rich in natural resources, its climate condition is conducive to agriculture, and historical and cultural ties will allow it to forge closer economic linkages with neighboring ASEAN communities in line with the aspirations of the ASEAN Economic Community.
Last but not least is the General Appropriations Act (GAA), the government’s budget for 2015. Following the controversies this past year, there has been increased and more intense scrutiny of the executive’s proposed expenditure items lately. Nevertheless, we are confident that just like the past four years, the budget will be passed on time, before the year ends. The proposed budget amounts to P2.6 trillion, a 15% increase over this year’s total appropriations. It is based on assumptions of 7-8% GDP growth, another P80-billion increase in the tax and revenue efforts to 15.5% and 16.5%, respectively, yielding a deficit of equivalent to 2% of GDP, about the same as this year’s target.
Budget officials have been stressing the importance of on-time passage of the GAA to enable the front-loading of priority expenditures, particularly infrastructure that should be completed before the start of the rainy season midyear. For 2015, the Aquino administration intends to bump up infrastructure spending to 4% of GDP (from 3.5% this year and 2.5% last year) and continues to raise allocations for education, health and the CCT program. Whether or not the government can in fact spend as planned to meet its growth and inclusivity targets is still a question mark as latest statistics (for August) show still anemic spending performance. On the other hand, we think there will be greater urgency for the administration to ramp up spending next year to secure political support for its candidates in the 2016 elections, especially for the Presidency.
Aside from the three, there is a slew of proposed economic reform measures that has been in the legislative mill for years, including a competition law for fair trade practices; amendments to the Build-Operate-Transfer Law to support the government’s Private-Public Partnership program; a bill clarifying the fiscal regime for the mining sector; and, in preparation for the AEC, liberalization of more areas for foreign investments, including a one-line “unless provided by law” amendment to free up economic restrictions in the Constitution.
The key piece, insofar as the short-term macro outlook is concerned, is the harmonization of fiscal incentives embedded in some 186 laws. Estimates put the cost of these incentives at 1-2% of GDP. Unfortunately, we expect that even if Congress approved this measure, it will likely be in diluted form. In fact going into an election season, we expect to see more revenue eroding proposals from Congress, with several bills lowering income taxes already under deliberation. We think the grounds for correcting long-term “bracket creep” on both equity and productivity are solid, and we do not expect these to appreciably dent public finances.
This column is based on a GlobalSource report written by Christine Tang and Romeo Bernardo.
Romeo Bernardo was finance undersecretary during the Cory Aquino and Ramos administrations, and board director of Institute of Development and Econometric Analysis Inc.
romeo.lopez.bernardo@gmail.com
source: Businessworld
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