POSTSCRIPT / July 31, 2005 / Sunday

By FEDERICO D. PASCUAL JR.

Philippine STAR Columnist

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Car, appliance prices to go up next month?

GOOD NEWS: Here is good and bad news about prices with the advent of August tomorrow and the rest of the second semester.

First the good news. The Central Bank predicts lower inflation (meaning “stable” prices) in the months ahead mainly because of its expectation that the prices of food and other basic items will stay more or less where they are now.

Inflation averaged 8.3 percent during the first semester, exceeding the government’s 7.9-percent forecast for the year. But for July, consumer prices rose only by 6.5 to 7 percent, slightly lower than the 7.6-percent inflation in June.

The second semester inflation rate is expected to be lower than the 7.9 percent predicted for the year. Central Bank Gov. Amando Tetangco Jr. attributes the lower forecast to “favorable weather and frontloading of rice imports.”

But while the government may manipulate rice importations to dampen price increases, how can it say that the other factor — favorable weather — will hold till yearend when it cannot even predict the weather next Sunday?

Pursuing his rosy assessment, Tetangco added that slowing inflation would give the Central Bank more room to keep interest rates low. He said this would help President Arroyo encourage investments.

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BAD NEWS: Now the bad news. The prices of luxury and non-essential goods, particularly those covered by the expanded Value Added Tax, are likely to go up when the Supreme Court lifts its temporary restraining order on the EVAT law.

The high tribunal is hearing several suits questioning the constitutionality of the EVAT law. The court’s lifting of the TRO is expected this month, triggering a flurry of price surges affecting VATable items. This foreshock comes before the court, dabbling in judicial economics, affirms the validity of the law.

Consumers planning to buy cars, appliances, electronic gadgets and other items with big price tags are under pressure to rush purchases to beat the TRO lifting and the expected price increases.

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PANIC ONLY, NO BUYING: Another round of prices increases may follow in January next year, if President Arroyo follows instructions in the EVAT law for her to raise the 10-percent VAT rate to 12 percent if certain revenue conditions are met.

In the case of cars, the price increases could trigger panic-buying by those who have the money or the gumption to seek financing. On the other hand, rising prices could dampen sales as consumers put off purchases or settle for cheaper or even second-hand vehicles.

Another major industry that will be affected is construction (which has been in the doldrums) and the related activities of land development, home improvement and real estate speculation.

With rising prices, growing unemployment and stagnating wages, many households can only panic, but not buy.

Some of the exceptions are households sustained by remittances from family members working abroad. That foreign-based revenue sector, comprising some 10 percent of the 85-million population, sends $8 billion annually through the banks and another $4 billion through unofficial channels.

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TAMING INFLATION: While agriculture — aided by the early rainy season and the dismantling of tong checkpoints — remains a bright spot, government planners monitoring prices are worried about the volatility of the price of oil and related products.

There is no significant economic activity that is not related to oil and energy, so fuel costs invariably affect prices of almost everything at the end-user level.

Oil prices are being pushed up by strong demand from the US and China. Data indicate that prices may remain high in the near term. The Central Bank projects that oil prices based on Dubai crude will average $49.90 in 2005, $53.47 in 2006 and $52.31 in 2007.

If the upsurge of oil price keeps up and the prices of oil-based products downstream follow, will the predicted 7.9-percent inflation rate by yearend be exceeded? Not necessarily.

Inflation is measured only on the basis of a basket of goods composed of food (40 percent or more), clothing, tobacco and beverages including alcohol, utilities, shelter (new construction and repairs), and rent.

The prices of heavy non-essential items are not factored in when the government intent on painting a rosy picture measures inflation.

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NEGATIVE POLITICS: Floating like a death shroud above the economy is partisan politics, which has been focused lately on the uncertain fate of President Arroyo battling for survival.

She has gained a reprieve of sorts after surviving the milestone test of her State of the National Address before a joint session of Congress last July 25. It has been a roller-coaster ride for her since her inauguration in June last year.

The uncertainty has dampened investment enthusiasm. As she herself noted in her SONA, the country is divided. She lamented that while it is poised for takeoff, the Philippines is weighed down by destructive politics.

In a move that was welcomed as deliverance by her allies but denounced as a diversionary device by her detractors, President Arroyo proposed in her SONA the fast-tracking of the move to shift to a parliamentary form of government before her term ends in 2010.

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NO TAKEOFF: My fearless forecast on the fresh initiative to revise or replace the Constitution to install a new form of government is that the charter and all its warts will remain until President Arroyo concludes her bumpy term.

What I foresee is a desultory debate that will drag on till it is too late to change the system before Gloria Macapagal Arroyo steps down on her own steam in 2010.

The cost of that grand distraction will be high. Too high.

Why will moves to change the system not take off? Mainly because there are just so many issues, so many variations of those issues, so many politicians poking their fingers into the charter… there will be so much confusion that the nation will end up more confused than ever.

That will be an invitation to anarchy. How President Arroyo will pick her way through the political minefield will be something to watch.

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GALVANIZING POINTS: A reader who asked not to be identified reacted to our last POSTSCRIPT relating to the quarrel over government incentives among firms in the business of galvanizing iron sheets. He asked several interesting questions:

“Before, the standard of the zinc coating was 270 grams per square meter of surface and they used cold rolled sheets. Why was the zinc coating reduced to 100 grams per square meter of surface which gives very much reduced protection against the elements?

“The use of hot rolled sheets makes the available sheets even more inferior because of the poor adherence of zinc to the surface of hot rolled sheets as against the cold rolled.

“Why are the galvanizing companies asking for more tariff protection when they are but employing in their production a handful of workers as against millions of users that could benefit from the low-cost imports?

“Imported galvanized iron sheets cost less, because they are mass-produced and their purchase of zinc is much lower due to the bulk of their purchases as compared to those of Philippine galvanizers.”

The businessmen quarreling over the galvanizing incentive pie may want to answer our reader’s questions.

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(First published in the Philippine STAR of July 31, 2005)

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