THE Philippines is expected to realize a fiscal deficit of 2.9% of gross domestic product (GDP) this year — slightly below the government’s 3% target — due to the sharp uptick in infrastructure spending, according to HSBC Global Research.
If realized, it would be greater than the actual budget gap of 2.2% of GDP logged in 2017.
“The Philippines has gone from an average deficit of -1.8% of GDP in 2007-2016 to 2.2% in 2017 and is on track to realize 2.9% in 2018 — with most of the increase going to infrastructure,” HSBC said in a research note dated July 31.
The Duterte government has pledged to spend about P8 trillion for infrastructure projects in a bid to grow the economy by 7-8% through 2022.
However, the fiscal deficit is below target so far, at P193 billion in the first semester, 25% higher than the P154.5 billion recorded in the same period last year, but 27% lower than the P264.3 billion target due to better-than-expected revenues.
HSBC warned of further inflationary pressures stemming from the government’s plan to widen the deficit target to 3.2% in 2019.
“The main takeaway is that further fiscal impulse should be expected into 2019, adding to what is already strong growth. Continued fiscal stimulus is likely to slightly delay the return of inflation to the mid-point of the BSP’s target, among other factors, which is partly why we expect the BSP (Bangko Sentral ng Pilipinas) to take decisive, pre-emptive action in its upcoming meeting,” HSBC said.
HSBC said it expects the central bank to raise policy rates by 50 basis points during its meeting on Aug. 9, which would be on top of the two 25 basis point hikes the BSP made in May and June.
The Development Budget Coordination Committee in its meeting last month widened the budget shortfall for 2019 as it seeks to accelerate spending for infrastructure and social programs.
The BSP expects inflation to reach 4.5% this year, and to return to its 2-4% target band by 2019.
Moreover, HSBC also noted the plan to shift to a Federal form of government and the Supreme Court’s ruling to increase internal revenue allotments to local government units (LGUs) may pose as a downward risk to the infrastructure plan.
“(A) recent Supreme Court ruling to increase national revenue allotments for local government units and/or an abrupt shift to Federalism may curb government spending on infrastructure projects in the near-to-medium term,” the report read.
Socioeconomic Planning Secretary Ernesto M. Pernia earlier admitted that such disruption may be possible due to the change in government structure.
Meanwhile, the government will file a motion for reconsideration on the high court’s order, seeking to clarify which taxes will be covered.
The court on July 23, ordered the “automatic release without further action” of LGUs’ “just share” of internal revenues that includes all national government taxes, not just the from Bureau of Internal Revenue, and that the government should implement the ruling prospectively.
Budget Secretary Benjamin E. Diokno said complying with the ruling would cost P160 billion more to the government, but noted that it could devolve some functions from the national government to the local government, to keep the fiscal deficit intact. — E.J.C. Tubayan

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