RP fiscal deficit may hit 24-year high, DBS says

MANILA, Philippines - The Philippines’ budget deficit will likely balloon to a 24-year high, exceeding latest revisions made by the country’s economic managers. Manila’s fiscal deficit may shoot up to P339 billion, the highest such shortfall since 1985, when the economy shrank due to political instability. The P339-billion shortfall was the projection made by the Development Bank of Singapore (DBS) in its latest research note. The figure represents 4.5 percent of the Philippines’ gross domestic product (GDP). DBS, reportedly Asia’s largest lender, said it was “not confident that the P250 billion deficit target can be met," it said, referring to the revised spending limits set by the government. “The government’s newly revised GDP growth forecast range of 0.8 percent to 1.8 percent is still overly optimistic, with our own estimates pointing to growth of 0.5 percent," it said on Thursday. “The growth outlook is not helped by the fact that government spending targets have now been reduced. Against this backdrop, revenue collection will continue to be a strain." The Finance Department has yet to release its five-month fiscal performance. In a separate report, Dutch banking giant ING made a similar forecast. It said that the country was likely to exceed its programmed spending limits for the year, which may lead to a credit rating downgrade that will increase borrowing costs. The “blowout in the [government’s] fiscal deficit" has created pressure on securities issued by the Philippines, including fixed rate treasury notes (FXTN) and dollar-denominated bonds, the bank said in its latest report. Manila’s latest revision of its fiscal deficit cap for the year – from P199 billion to P250 billion – may have implications beyond prices of government securities. Although Manila proposes to raise anywhere from $500 million to $1 billion from Japanese investors through a Samurai bond sale, it may be unable to prevent the country from revising its spending limits further, ING analyst Tim Condon said. “…[F]urther revisions to the deficit target and that the likelihood of a negative rating action has gone up," Condon said. Earlier, foreign entities such as Citibank have also made the same projections. Citibank expects the government to spend P400 billion more than it earns this year owing to weak collections of the Bureau of Internal Revenue (BIR), the national government’s largest revenue source. Other foreign banks have made dire predictions about the country’s 2009 deficit level. In its latest staff report, the International Monetary Fund (IMF) said the market was likely to tolerate a deficit level equivalent to 3.5 percent of gross domestic product (GDP) but not much more than that. Citibank said it expected the country’s deficit level to balloon to as high as P400 billion this year and even the proposed $500-million Samurai bonds would not be enough to finance a fiscal slippage of this magnitude. In its latest macroeconomic review, Citibank revised its fiscal outlook for the country, prompted by the combination of weak cyclical environment and its expected decline in tax collection for 2009. Separately, the International Monetary Fund (IMF) said that the market would be able to tolerate a deficit that is equal to 3.5 percent of the Philippines’ gross domestic product (GDP). For its part, Standard & Poor’s has already issued warnings of a possible credit rating downgrade for the Philippines, making it more difficult and expensive for the country to access credit, especially from foreign sources. The downgrade may result from delayed reforms and weaker revenues, both of which lead to a higher fiscal shortfall. The country’s narrow tax base and inefficient government-controlled corporations have been its main weaknesses which has been the same for the last few years, S&P senior analyst Agost Benard said. Meanwhile, in a Wednesday forum sponsored by the Freedom from Debt Coalition, former Budget and Management Secretary Benjamin Diokno warned that recession, or two quarters of economic contraction, would last until next year. “What we have is a rare combination of financial sector-driven and globally synchronized recessions. Past experience suggests that such recessions last almost two years and it takes three and a half years for economies to return to pre-crisis output levels," Diokno said in the statement furnished by FDC. Saying “the worst is yet to come," the University of the Philippines professor cited falling remittances, low foreign direct investments (FDIs), and the strong possibility that the economies of the top 10 export markets, which account for about 85 percent of total exports, will deteriorate this year will make matters worse. Walden Bello, senior analyst of the Bangkok-based Focus on the Global South, said this is the "perfect" time for the government to "repudiate illegitimate debts and/or demand from lending institutions and countries the cancellation of such debts." "The message is clear. Less debts, less crisis," he said. "Nothing short of a radical reduction of the country’s debt is needed to create necessary fiscal space to increase state spending to protect the most vulnerable sectors of our economy from the immediate effects of the crisis." - With Ruby Anne M. Rubio, GMANews.TV