How Arroyo Is Dodging Impeachment

Amid allegations of election rigging, the Philippines president wants to focus on economic matters. Will the distraction work?

By Frederik Balfour

Talk about bad timing. Just a few hours before Gloria Macapagal Arroyo, President of the Philippines, was to deliver her annual State of the Nation address on July 25, opposition parties delivered an impeachment petition to Congress. They charged that she "stole, cheated, and lied" to stay in office.

To make matters worse, as Arroyo delivered her 20-minute televised address from the House of Representatives, tens of thousands of protesters marched outside, chanting for her ouster.


  An opinion poll released the day before her speech showed 52% of respondents favored her resignation. The primary accusation against Arroyo is that she tried to rig results during the 2004 presidential election, which she won with nearly 40% of the popular vote.

After initial denials, on July 1 she admitted that she had made a call to an election commission officer, but denied any wrongdoing.

One could add either incredible hubris or extraordinary naïveté to her list of alleged sins, which also includes bribery, graft, and betrayal of the public trust.


  It turns out the controversial conversation with the election official was taped. The 58-year-old president is certainly old enough to remember Watergate. That she spoke on the telephone without considering the call might be recorded is hard to fathom.

But unlike former U.S. President Richard Nixon, who was undone by Watergate, Arroyo is showing great political savvy amid the revelations. During her address, she wisely steered clear of the allegations against her and instead focused on the country's considerable fiscal challenges.

And in what is widely seen as an especially shrewd move, she came out in favor of replacing the current presidential system, which she says has caused divisiveness, with a parliamentary one.


  That, says Guillermo Luz, executive director of the Makati Business Club, was a wily way to gain support among congressmen, many of whom favor a parliamentary system because the current one bars them as lawmakers from holding cabinet posts while in office. "It's designed to get Congress on her side, a Congress who is about to hear her impeachment case," he says. "It's a way to distract them."

Arroyo must also find a way to distract people on the streets. After all, President Ferdinand Marcos was driven from office in 1986 by the People Power uprising, and President Joseph Estrada was ousted by similar demonstrations in 2001 and replaced by Arroyo, who was vice-president.

Still, recent street protests haven't been nearly as large as the fateful uprisings that doomed Marcos and Estrada. Arroyo still has the support of big business and the Church, the two major power blocks in the country.


  The third group Arroyo needs to keep on her side are foreign investors, especially buyers of Philippine bonds. The Philippine government is one of the biggest and most frequent sovereign debt issuers in Asia. If she is able to placate investors, it will help her meet her other great challenge: Getting the government's finances in order.

Indeed, in her July 25 speech, Arroyo made no secret of her priorities. She said she will maintain "fiscal discipline, whatever the political cost." There's no doubt that Arroyo, who has a Ph.D. in economics from the University of the Philippines, understands the scope of the problem.

At the end of last year, the nation's public sector debt stood at $95 billion, accounting for 110% of gross domestic product. Standard & Poor's predicts that this year, 40 cents of every dollar in the government budget will go towards servicing the debt. S&P has assigned the Philippines a current sovereign rating of BB minus, three notches below investment grade -- the lowest since 1993.


  Ironically, Arroyo was off to a good start in trimming the deficit before her troubles started. Tax collections have increased dramatically, thanks largely to reforms that link revenue officers' remuneration to their performance.

The budget for the first half of 2005 is likely to show a deficit well below the $3.2 billion that had been projected. "The government is sitting pretty if they can maintain the revenue effort as they have done for the first six months," says S&P sovereign credit analyst Agost Benard.

However, Arroyo's political problems threaten the government's ability to maintain momentum for the second half of the year. On July 1, the Philippines Supreme Court suspended modification of a value added tax (VAT) that would have earned the government an extra $630 million over the next six months and even more next year, when the VAT was to have been raised from 10% to 12%.


  S&P revised its outlook on the Philippines July 11 from stable to negative, based on "the ongoing political turmoil in the Philippines," says Benard. The downgrade could be extremely painful. The Philippines already pays about 500 basis points above LIBOR on its 20- and 30-year bonds -- on a par with Venezuela and Lebanon, two countries that could hardly be classified as good credit risks.

Despite the progress made in the first half of the year, the Philippines will have to borrow between $850 million and $1 billion to cover its yawning deficit for 2005. Higher interest rates would mean fewer cents out of every dollar going to much-needed spending on education, health care, and infrastructure.

The markets seem to expect Arroyo to weather the current political storm. The spread on Philippine bonds only increased by about 20 to 25 basis points in the first part of July and has started to narrow again.

And it will be 60 days before the justice committee of the lower house makes a decision on the legality of the impeachment petition before tabling it for a vote. Still, it looks like it's going to be a long, hot summer for Arroyo.

Balfour is BusinessWeek's Asia Correspondent

Edited by Patricia O'Connell

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