Emerging Markets, May 2010

Philippine policymakers say they can breathe life into the country’s flagging deficit reduction programme despite two years in which previous progress has been reversed.

“We should be able to hit our deficit target this year to put our long-term budget goals back on track,” Margarito Teves, Secretary of Finance for the Philippines, told Emerging Markets.

Fiscal consolidation has been a vital mainstay of government policy in recent years in order to free up money that goes on interest payments for other vital work. In 2004 government debt was equivalent to 79% of GDP and interest payments on that debt were taking 37.3% of all revenues. The budget deficit has been similarly damaging, and its ratio to GDP stood at 5.4% in 2005. The government reduced it to 0.2% by 2007 and had planned to balance the budget in 2008.

“But the onset of the global economic crisis convinced us that it was far more important to invest in stimulating our economy and providing social services for our people,” Mr Teves said. In 2009 the deficit was back at 3.9% of GDP and in March 2010 stood at a total of Ps63.9 billion. The target is now to balance it by 2013.

For Mr Teves to be right, the government will have to improve its record on tax collection, a perennial problem in the Philippines. Mr Teves said Bureau of Customs collections grew 40.5% in the first quarter and the Bureau of Internal Revenues by 12.4%. But he added: “Our revenue collection was inevitably adversely affected by the slowdown in the global economy.” He called upon the incoming Congress to pass new tax measures, such as changes to excise rates on alcohol and tobacco and a review of VAT exemptions, after this month’s general election.

The election itself is being closely watched by investors but Mr Teves tried to distance economic performance from electoral uncertainty. “The Philippine economy has time and again proven that it is much more decoupled from political developments in our country than in the past,” he said. “Political noise will be inevitable as we move closer to the elections, but… we are positioned for higher levels of growth as the global economy continues to recover.”

Amando Tetangco, governor of Bangko Sentral ng Pilipinas, said he believed the Philippines should grow “closer to the higher end” of the government’s GDP growth rate target of 2.6-3.6% for 2010. “The Philippines is in a good position to reap the benefits of the global rebound,” he said, adding it “can profit from a pick-up in external demand and an acceleration of its remittance proceeds.” He emphasized strong domestic consumption, strong prospects in BPO and tourism, and a rebound in investments.

Analysts are less sure. Barclays Capital analyst Rahul Bajoria thinks the budget shortfall will get worse, not better, and will hit 4.2% in 2010. He also expressed concern about slow progress in privatization of state assets, with PNOC Exploration’s planned sale of a stake in Malampaya natural gas project, expected to raise Ps14 billion, pushed back to at least the third quarter. “This may put additional pressure on the fiscal balance in the short term,” he said, although he did not think the situation was bad enough to trigger rating movements in the near term.

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