Aquino Names Philippine Cabinet

06/29/2010 - MANILA—When Benigno Aquino III is sworn in as Philippine president Wednesday, he'll inherit a yawning budget deficit, but also an economy regaining momentum.

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Philippine President-elect Benigno Aquino III announces the members of his Cabinet during a news conference in Quezon City, Manila on Tuesday.
.Mr. Aquino won a landslide victory in May elections on a platform promising clean government and honest efforts to address investors' concerns about the country's business climate.

But the most pressing concern for this scion of one of the Philippines' most distinguished political families may be getting the country's fiscal house in order.

Announcing his Cabinet Tuesday, Mr. Aquino said he expects the deficit to reach a record 349 billion pesos ($7.5 billion) this year, about 4.2% of gross domestic product. He says he will consider new taxes to fill that only as a last resort.

Mr. Aquino said charges will be filed against known smugglers and tax evaders, to set an example and serve as a warning to the public.

"Before we think of new taxes, we must first consider if we're collecting the right amount of taxes," he said after announcing the Cabinet appointees.

He'll be surrounded by a clutch of experienced hands, including several figures who crafted outgoing President Gloria Macapagal Arroyo's fiscal-reform program.

Ms. Arroyo's program, particularly a 2005 bill that added 80 billion pesos to public coffers by increasing the value-added tax and expanding its coverage, was on its way toward achieving a balanced budget when the global financial crisis hit in 2008. The crisis forced the government to increase spending to reverse the economic slowdown.

The economy lately has shown strong signs of recovery, growing 7.3% in the first quarter of 2010 from the previous year.

As expected, Mr. Aquino named Cesar Purisima as finance secretary. Mr. Purisima held the same role for a time under Ms. Arroyo, and also served as her trade secretary.

An accountant by training, Mr. Purisima helped design Ms. Arroyo's fiscal-reform package and was especially committed to going after tax evaders and smugglers.

He was one of a number of officials who quit in July 2005, hoping their resignations would force Ms. Arroyo to step down over allegations of fraud in her 2004 presidential election victory.

Returning to the Bureau of Internal Revenue, this time as its leader, is Kim Henares, who worked with the World Bank after serving as undersecretary in charge of the large taxpayers group at the BIR.

Other appointments include Cayetano Paderanga as economic planning secretary; Gregory Doming as trade and industry secretary; Jose Rene Almendras as energy secretary; Rogelio Singson as public works and highways chief; Rosalinda Baldos as labor secretary; and Proceso Alcala as agriculture secretary.

Mr. Aquino said he expects some of his appointees to stay in the Cabinet for no more than two years, given the low salaries in the public sector. He said he's still evaluating candidates for the post of chief of the Customs Bureau, which together with the BIR accounts for almost 90% of government's revenue.

That may prove to be a key post if Mr. Aquino hopes for a boost to the country's credit ratings. Fitch Ratings said Tuesday that the Philippines' low level of government revenue—about 15% of GDP, among the lowest for any sovereign Fitch evaluates—is a ratings weakness. Fitch rates the Philippines at BB with a "Stable" outlook. The agency needs to see details of Mr. Aquino's fiscal plans before reconsidering that rating, Andrew Colquhoun, Fitch's head of sovereign ratings for Asia-Pacific, told Dow Jones Newswires.

"Signs that the new administration did not take the situation seriously would be negative for the ratings, although I would stress this is not our expectation," Mr. Colquhoun said. "Conversely, effective reforms that succeeded in consolidating the public finances and raising the revenue take would support the ratings."

Christian de Guzman, a member of Moody's Investor Service's sovereign risk group, said the choice of Mr. Purisima sends "a strong signal in line with (Aquino's) campaign theme of anti-corruption and integrity."

He added: "To the extent that the Aquino administration will not be hamstrung by questions of legitimacy that dogged the previous administration, a stronger electoral mandate may make deficit reduction more politically feasible."

Outgoing Finance Secretary Margarito Teves, who met with Mr. Purisima on Monday, said the Aquino administration will be starting at a disadvantage because the government's revenue-generating position has been weakened at a time when its fiscal requirements are higher.

Mr. Teves said new taxes would provide the government with the flexibility to manage the deficit while it seeks to improve the efficiency of tax collection. He said pending tax proposals, including raising the VAT rate to 15%, could bring in an additional 200 billion pesos of annual revenue by 2016, when Mr. Aquino's six-year term is scheduled to end.

The president-elect also has pledged to attract new investment to the Philippines, which has seen foreign direct investment decline in recent years even as it rises quickly in other parts of Asia. Mr. Aquino has said his government will address a litany of complaints from investors, including poor infrastructure, costly electricity, questionable law and order and unstable government policies.

While Mr. Aquino's Liberal Party didn't win a majority in either the Senate or the House of Representatives, forming a coalition to support his legislative agenda shouldn't be a problem given the landslide victory—and goodwill—that he secured in May.

As for his promise to root out corruption—a pledge many take to mean Mr. Aquino will go after Ms. Arroyo and her allies—the president-elect said he will create a "Truth Commission" headed by former Supreme Court Chief Justice Hilario Davide to investigate alleged corruption and other controversies. (THE WALL STREET JOURNAL)

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