2010 deficit could hit 3.5% of GDP - Moody's

The budget deficit may hit 3.5% of gross domestic product (GDP) this year, Moody’s Investors Service said as it stressed the need to raise revenues to sustain the country’s credit standing. "The lingering effects of the recession would mean weaker than par revenue performance in 2010 and a budget deficit close to 2009’s ... We think the deficit will narrow slightly in 2010 if the economy recovers and tax revenues improve," Moody’s Senior Vice-President Thomas Byrne said in an e-mail to BusinessWorld. "Also, elections will be held in 2010, so it will be especially difficult to rein in expenditures. The deficit would be somewhere around 3.5% of GDP in that case," he added. "For us, a credible effort to boost revenue generation as the economy moves out of its near-recession would be necessary to support the Ba3 rating and stable outlook." A shortfall equivalent to 3.5% of GDP is equivalent to some P291 billion, close to the Finance department’s P293-billion estimate and higher than the initial target of P233.4 billion. A Ba3 rating, which is three notches below investment grade, is considered "speculative". Sought for comment, Finance Undersecretary Gil S. Beltran said: "We still want to achieve fiscal consolidation and trim the deficit ... We will implement tax administration measures to raise revenues. The collection agencies should improve their capability to meet their targets." "I think 2010 will be a better year. We expect imports to recover. We will continue to ask Congress to pass revenue measures," he added. Mr. Byrne said the government’s long-term obligations have spared it from immediate refinancing and rating pressures but he warned of a downgrade if a "sizable deficit" was incurred. "Government debt has relatively long maturities on average and that peso debt can be absorbed by a liquid domestic financial market. This relieves refinancing, and rating, pressures over the near term," he said. "Moreover, excluding interest payments, the budget will still run a primary balance surplus in 2009, albeit a very thin surplus of around 0.2% of GDP by our calculations. If the budget were to really blow out and the primary surplus shift into a sizable deficit, that would place downward pressure on the rating." The government posted a primary deficit -- which excludes interest payments on its debt -- of P12.4 billion as of November. Noting that countries in the region are running high deficits due to the downturn, the Moody’s official said they would not downgrade a rating in general unless the shortfall could no longer be financed by domestic or foreign creditors and if "prospects are dim for medium term fiscal consolidation." "I would think the government’s ability to finance its deficit without encountering rising costs would hinge on a containment and gradual reduction in the deficit... Improving revenue generation is essential to fiscal sustainability," Mr. Byrne said. He said last year’s budget gap may have reached 3.7% of GDP or around P288 billion. Weak revenues blamed on the economic slowdown, among others, swelled the shortfall to P272.5 billion as of November, over four times the P66.7 billion a year earlier. -- A. D. B. Romero, BusinessWorld