The next president will have to turn his back on populist promises made during the campaign and raise taxes sooner rather than later to prevent a financial crisis soon after the May elections. Asia's largest sovereign issuer of offshore bonds may post its second successive record budget deficit this year, and the key factor that will determine how markets react to the election result will be whether the winning candidate tackles the fiscal situation with sufficient urgency and resolve. Most analysts say markets should not be too ruffled in the meantime if candidates pledge not to raise taxes or impose new revenue measures. Such promises are highly unlikely to be kept. “Any candidate who ... promises no new taxes is going to eat his words,” said an economist at a large local bank. “It's going to happen, otherwise we could lose the confidence of investors.” The four leading presidential candidates in the May polls have all promised measures to boost the tax to GDP ratio, estimated at a five-year low of 12.8 percent last year, but most of them have given scant details on how they will do it. Of the four, frontrunner Benigno Simeon Aquino III and former President Joseph “Erap” Estrada, ranked third in opinion polls, are the only ones who have declared they would not impose new taxes or raise tax rates and would instead focus on plugging tax leakages that have kept state revenues low. But Aquino softened his stance last month when he told Reuters he would consider raising taxes if the budget gap was not quickly cut by a crackdown on tax evasion. Aquino was aiming to soothe market worries that he did not grasp the urgency of raising state revenues. Analysts and traders say they largely ignored his first statement on taxes in January because they did not expect him to stick to it if he won power. But if the next president does try to avoid new taxes, this will be punished with a sell-off of Philippine assets by markets worried about the precarious fiscal position. “The government is like a patient in an intensive care unit and it needs to raise taxes as the prescribed medicine to recover fast,” Jonathan Ravelas, chief market strategist at Banco de Oro Unibank, told Reuters. Traders say offshore investors would sell out wholesale from the Philippines if there was any sign the next president will introduce drastic changes to economic policy that quickly show positive results via higher state revenues.
