FACTBOX-Key political risks to watch in the Philippines

MANILA, Oct 1 (Reuters) - New Philippine President Benigno Aquino III took office on June 30 facing many old problems: a large budget deficit, endemic corruption, widespread poverty and long-running insurgencies.

Following is a summary of political risks to watch:

* GOVERNMENT EFFECTIVENESS

Aquino, son of two heroes of the Philippines democracy movement, campaigned as a man who would fight corruption, respect human rights and deliver honest and transparent government.

After two administrations dogged by allegations of corruption and mismanagement there is an enormous weight of public expectation for him to deliver, which could prove its own burden given his reforms will take time to produce results.

In his first State of the Nation address in late July, he said the government would create a business- and investor-friendly environment to attract investment needed to improve infrastructure. [ID:nSGE66P0CT]

He was not the first to promise this, and the 50-year old's lacklustre political career before becoming president has raised concerns that he lacks the political savvy to take on entrenched interests and push his agenda through Congress, where allegiances are loose and personalities matter more than political beliefs.

Aquino will have to work with a bureaucracy dominated by appointments made by predecessor Gloria Macapagal Arroyo during her 9-?? years in office.

He has put experienced hands in financial positions in his cabinet and his Justice Secretary is a former human rights commissioner. [ID:nSGE65S0C4] [ID:nSGE65R02Q]

Aquino is setting up a "Truth Commission" to investigate allegations of corruption, electoral fraud and rights abuses against Arroyo and her administration. Arroyo denies any wrongdoing. [ID:nSGE65S0F3]

She remains a political force, having won a seat in the lower house of Congress from where she could marshal opposition.

Aquino's Liberal Party does not have a majority in either house of parliament, although his numbers have been boosted by defectors from other parties hoping to win favour and funding. World champion boxer Manny Pacquiao won his seat in May as a Nacionalista Party candidate but has since joined the Liberals.

What to watch:

-- Competing interests within the political groups around Aquino, including his family and relatives. Any infighting could hinder policymaking, and could weaken Aquino by reviving concerns over his track record, experience and preparedness.

-- Aquino is due to submit his budget for 2011 before the end of August, and has to move past the rhetoric of the campaign and the criticisms of Arroyo. He needs to deliver a realistic fiscal roadmap that meet his goals of strengthening revenues while spending more on social services and infrastructure, and meeting a target of halving the budget deficit to 2 percent of GDP by the end of 2013.

-- Aquino needs to build working relations within the court system, which he wants to reform, to support his plans to investigate Arroyo and officials in several unresolved high-profile corruption and rights abuses cases.

* FISCAL STRAITJACKET

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 because state revenues remain weak despite a major sales tax reform in 2005.

The deficit in the first half of the year was nearly 200 billion pesos ($4.4 billion), about one-third higher than the estimate of the Arroyo administration. The new government has raised the full-year target to 325 billion pesos. [ID:nSGE66K0ET]

The shortfall in revenue, due mainly to a narrow tax base and chronic evasion and corruption, limits the government's ability to spend more on social services and upgrade infrastructure, and therefore acts as a long-term drag on growth.

Government spending will be reviewed to see what can be cut.

The government plans to raising tax revenue through better enforcement and a crackdown on evasion and smuggling, before considering any tax increases. The enforcement drive will be given two years to work. [ID:nMNB002685]

What to watch:

-- Markets are closely watching how effective the tax enforcement measures are in raising revenues. Without success on this front, the deficit is unlikely to fall as expected and could widen further.

-- How any new spending in the budget will be funded, and what assumptions the figures are based on. The government is targeting the fastest growth in 35 years in 2011. [ID:nSGE6680FQ]

-- Markets would like a rise in tax rates and expansion of the tax base to more sustainably support state spending. Until then, the Philippines is likely to remain plagued by fiscal problems. [ID:nSGE65S0E0]

* INTERNAL SECURITY

Security remains poor across the Philippines, which is struggling with two long-running insurgencies by Muslim separatists in the south and Maoist guerrillas.

Peace talks may regain momentum under Aquino, who has said a a secure and sustained peace is needed to foster growth and investment. The government is reviewing the negotiating process, and has said talks with Muslim separatists on Mindanao are more advanced than with Maoists. [ID:nSGE66F05Q]

Talks with the Moro Islamic Liberation Front, the largest Muslim rebel group, have bogged down on issues such as territory, wealth and power-sharing, although a shaky ceasefire was re-established in mid-2009.

Maoist-led guerrillas have expressed a willingness to resume talks with the Aquino government, but rejected Aquino's call for a ceasefire for negotiations to prosper. [ID:nSGE66Q06G]

The smaller but deadlier Abu Sayyaf group still presents a problem despite some tactical successes by U.S.-backed Filipino troops. [ID:nSGE65B00J] [ID:nSGE66R0CK]

Aquino also needs to crack down on rights abuses and crime, including the murders in June of local journalists and a witness to the election-related massacre of 57 people last November. [ID:nSGE65N0CC] [ID:nSGE65M09M]

Aquino's government is expected to be more aggressive in pursuing the massacre case than the previous administration. The chief suspect is from a powerful political clan on Mindanao that supported the previous administration. [ID:nSGE66R06A]

What to watch:

-- Evidence showing serious attempts to address root causes of armed conflicts to end extortion from businesses, reduce the kidnapping threat to businesspeople and open up resource-rich Mindanao to investment would be broadly positive for markets.

-- Detailed initiatives by Aquino for peace talks with Muslim and communist guerrilla groups, including new sets of negotiators and negotiating parameters. He has named a law professor with expertise on indigenous rights, environment and ancestral homeland issues as his chief negotiator with the MILF.

-- Aquino's appointments to defence and military organisations and plans to increase spending could help keep security forces onside and negate a potentially destabilising force. [ID:nSGE66M0A2]

-- His mother's government faced more than half a dozen coup attempts between 1986 and 1992 as democracy was restored, scaring potential investors and slowing growth. Arroyo survived three coup attempts, including two related to allegations of fraud in the 2004 election. ($1=45.6 pesos) (Compiled by Manila Bureau; Editing by Andrew Marshall)