Philippines: Budgetary Blowout

2002

Malcolm Cook

By the end of July, the Philippine government had already breached its projected year-end budget deficit of P130 billion raising fears of rising interest rates, slashed government expenditures, and a weakening peso. It is now estimated that the end-of-year budget deficit may balloon to between P160-170 billion, the largest nominal budget deficit ever. In August the Department of Finance was forced to lower the annual revenue targets for the Bureau of Internal Revenue and Bureau of Customs that together collect 90% of total government revenues. The Department of Budget Management warns that budget releases for the second half of the year will be greatly reduced, even though it is revenue shortfalls not expenditure overruns that are crippling the budget.

While the government steadfastly claims that the year-end budget deficit figure is still achievable through expenditure cuts and revenue collection reforms, there is no chance the deficit will be capped at P130 billion. In the longer term, the Macapagal-Arroyo’s plan to balance the budget by 2006 and greatly reduce the issuance of external and local public debt now also looks unachievable, undermining a return to strength for the Philippine peso or a reduction in the public debt stock now approaching P2.6 trillion. This year’s fiscal shortfall reverses the gains made by the new Macapagal-Arroyo administration in 2001 when the year-end budget deficit reached P147.1 billion, only P2.1 billion more than projected; a reputation booster that led to a credit rating upgrade in April 2002.

The present benign monetary situation in the Philippines may be the most noticeable victim of the budget deficit. Mid-year, Philippine Treasury Bills, both short-term and longer-term, were fetching the lowest interest rates on record, while international bond offerings were heavily oversubscribed. This allowed the central bank to keep both interest and inflation rates at historic lows while defending the peso within the 49-51 per US dollar range providing a period of growth enhancing easy money and macro-economic stability. Already, local Treasury Bill rates are starting to move up, and the peso is showing new signs of weakness moving upwards to 52 to the US dollar while the dollar is weakening against other major and regional currencies. So far, the Philippines has not suffered a credit rating downgrade due to these resurgent fiscal problems, but the latest reports from Morgan Stanley and others are noticeably gloomier. Both local and foreign investors are worried that 2001’s strong fiscal performance was an exception to the rule of budget deficits, rising debts, high interest rates and macro-economic volatility. If the government fails to achieve its lowered revenue collection targets for 2002, credit rating agencies may be forced to act in early 2003 or before.

WATCHPOINT: If El Nino hits the Philippines late this year as expected, pressure on the government to spend more will grow while revenues will soften.

 

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