MANILA, June 30 (Reuters) - Benigno Aquino III was sworn in as the Philippines' 15th president on Wednesday, promising to take on entrenched corruption.
Aquino won last month's presidential election with the widest margin since democracy was restored in 1986 by his mother, the late president and national heroine Corazon Aquino.
Now the reluctant leader needs to show more political savvy than his lacklustre 12-year record as a legislator would suggest.
The following are some of the major policy challenges Aquino will face in his six-year term:
BUDGET DEFICIT
The Philippines, Asia's largest sovereign issuer of offshore debt, is on course to post its second successive record budget deficit in nominal terms this year, largely due to its failure to substantially lift state revenues despite a major sales tax reform in 2005.
The outgoing administration of Gloria Macapagal Arroyo ended 2009 with a budget deficit of 3.9 percent of GDP, or 298.5 billion pesos ($6.4 billion), a record in peso terms, and it expected a shortfall of 3.6 percent of GDP or around 300 billion pesos this year.
That forecast will be reviewed by Aquino's team, as the deficit for the first five months of 2010 was 162.1 billion pesos, more than the first-half target of 145.2 billion pesos.
While the deficit is comparatively far smaller than the deficits of major economies such as the United States and Britain, a narrow tax base and chronic evasion and corruption limit the ability of the government to lift revenues and spend more on social services and infrastructure upgrades.
Aquino has said he would improve collections by enforcing existing tax laws, but markets are waiting to see if he decides to raise tax rates to more sustainably support state spending.
His finance secretary, Cesar Purisima, said the deficit needs to be cut but does not have to eliminated.
CORRUPTION
Aquino has vowed to run after smugglers and tax evaders but that campaign is unlikely to raise state revenues immediately. He also promised a clean and honest government, punishment for corrupt officials and a better investment environment.
He is setting up a "Truth Commission" to investigate allegations of corruption, poll fraud and rights abuses of the Arroyo administration.
Arroyo, in office for 9-½ years, was hounded by a string of controversies, including that her family and political allies benefitted from government deals. She denies any wrongdoing.
The Philippines has a reputation for endemic corruption, which extends through all levels of government and is a serious barrier to attracting more investment.
Transparency International's 2009 Corruption Perceptions Index suggested a marginal improvement from the previous year, with the Philipines rising to 139th out of 180 countries from 141st the previous year.
SECURITY
Aquino will need to address peace and security issues across the archipelago of 7,100 islands. He plans to double defence spending to 2 percent of GDP, but that may not be enough to quell the country's twin insurgencies.
Security issues, particularly in the south, are a major impediment to foreign investment and development of resource-rich Mindanao island.
Negotiations with the Moro Islamic Liberation Front, the largest Muslim rebel group, are bogged down by issues such as territory, wealth and power-sharing, although a shaky ceasefire was re-established in mid-2009. Maoist-led guerrillas have been waging a decades-long insurgency, but peace talks stalled under Arroyo. They have said they are willing to talk to the Aquino administration.
The smaller but deadlier Abu Sayyaf group still presents a problem despite recent tactical successes by U.S.-backed Filipino troops, and they are not interested in negotiations.
($1=46.4 pesos)
(Reporting by Rosemarie Francisco; Editing by John Mair and Sanjeev Miglani)
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