Balanced budget remains elusive amidst high inflation, global slowdown
Lala Rimando , abs-cbnnews.com/ Newsbreak | 05/15/2008 3:44 AM
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It was a promise not meant to be broken.
A balanced budget this year could have been the President Gloria Arroyo and her economic team’s seal of good housekeeping and an indication of her administration’s strong resolve to put its fiscal house in order.
But since the start of 2008, one global situation beyond the administration’s control after another has since crumbled the cabinet’s hopes that the government could still hold on to its horses no matter what.
On Wednesday, finance secretary Margarito Teves admitted that by yearend, the country’s budget may be in the red after all—and there might be need for more borrowings.
“If we hit the balanced budget, fine. But we are not considering that as a sacrosanct goal,” Teves told reporters.
Teves stressed that the administration is not yet totally throwing all hopes for a balanced budget. “We’re still not abandoning it. The important thing is [that] we can generate resources from tax and non-tax sources so we can continue to improve our fundamentals and attain a higher level of growth, given the very, very challenging circumstances that we are face today.
Beyond control
The economic managers are faced with two challenges beyond their control: rising food and oil prices that inflation, and slowing world economy that limits its ability to raise revenues.
The rice supply and price situation exposed how vulnerable the country is when the global market for importers and exporters of rice prove to be imperfect.
The Philippines, the world’s biggest rice importer, is trying to buy 2.2 million tonnes of rice ahead of a traditional lean period in the third quarter but it is struggling to attract volume as exporting nations, such as Thailand and India, curb shipments to keep a lid on their own food inflation.
Nervous president Arroyo’s efforts to seal government to government deals outside of the normal commercial transactions were partly to blame for the flare up in rice prices. Going spot rate for rice prices now are in the vicinity of $1,000 per ton, a big jump from just about $700 per ton when the Philippines contracted about 1.2 million tons from Vietnam over a month ago.
Analysts from Credit Suisse calculated in their April report that because the National Food Administration, which is the rice trading, distribution and marketing arm of the agriculture department, imports the rice at these rising prices and sells them to the domestic market at low prices, NFA will incur an additional loss of about US$1.3 billion. That translates to almost one percent of GDP.
Ultimately, the impact of more expensive rice is higher inflation across most consumer goods. In April, the price of rice soared by nearly 25 percent from a year ago. Overall food prices rose 12 percent.
Inflation in April soared to 8.3 percent, the highest since May 2005 and far above the central bank's expected range of 6.4 to 7 percent.
Oil prices and recession
To add insult to injury, the price of oil has been skyrocketing. Spot rates of US$126 are at their oil-time high, breaching historical levels almost everyday. Supply concerns, especially on the hostile situation in Nigeria’s oil-rich southern region where pipeline bombings, have made global oil markets jittery.
High oil price levels adversely affect several industries and have put upward pressure on the inflation rate. Not surprising that transport groups have been pushing for fare hikes while labor groups have been calling for wage hikes.
Another whammy is the economic recession that the US is facing. Though former US Federal Reserve chairman Alan Greenspan was quoted as saying the world’s biggest economy is up for just a mild recession, inevitably this will affect exports of the Philippines both directly to the US and indirectly through its neighbors, like China and Japan, which also trade with the US.
Teves acknowledged that the slowdown will not spare us. “It will affect our economy,” he said.
He also added, “We will have difficulty collecting [more] taxes.”
And there lies a major concern.
Balanced budget
In 2008, tax collection efforts are supposed to reach about P1.11 trillion. That’s about 14 percent more than 2007’s when the economy grew at a whopping 7.3 percent. Yet, more taxes are expected as economic growth for this year would slow down to just about 6.3 percent.
Besides reforms in the tax administration efforts and stronger implementation of the RVAT, which is expected to add some almost P100 billion into the revenue pool, the government is fast tracking the disposal of some government-owned assets. Proceeds are expected to be enough to plug the deficit.
Teves remarked, “Our primary consideration is to generate resources from tax and non-tax sources so that we can meet the needs of our economy and at the same time, trying to maintain fiscal discipline.”
Meanwhile, the economic team hoped that while borrowing continues despite a balanced budget—government is constantly paying off old debts so it has to borrow even when spending is equal to its revenues—it could at least reduce them.
The original plan for 2008 was to trim down borrowings from P394 billion in 2007 to P346 billion in 2008. Financing requirements were supposed to rely on a 36:64 mix in favor of domestic markets and concessional ODA and program loans. Relying on longer-term domestic notes and bonds will be pursued to further develop the domestic capital market. Some P245.3 billion or 92.9 percent of the domestic borrowing should be in the form of notes and bonds.
After the government issued a $500 million global bond in January, it said it was not planning another foreign debt issue this year. But that was before the yields in the domestic bond market have been increasing steadily because of rising inflation. That means more expensive for the government to tap the domestic capital markets. The treasury department has rejected bids at several auctions for domestic bond for about three months now.
“We have to check whether it is prudent to consider going back to our previous ratio of about 64:36,” Teves explained. “But again, let’s not be governed by numbers but rather direction. In the end, what’s important is that we are able to avail of either domestic or foreign loans that are most beneficial to our country.”
More borrowings, however, mean more interest expense that cut on revenues, thus diminishing the likelihood of balancing the budget.
Credibility
Creditors and analysts have hinged the credibility of the economic managers on whether it could deliver on their promise.
Earlier, Asian Development Bank deputy general for Southeast Asia, Thomas Crouch, told reporters that deferring the plan to balance the budget in 2008 would put the credibility of the country’s economic managers under the cloud. “The market might become a little bit more nervous if it wasn’t to be achieved,” Crouch then said.
But for others, when a balanced budget is achieved should not be cast in stone. Jose Salceda, the former economic adviser of President Arroyo and governor of Albay, earlier said that balancing expenditures and income this year might be untimely given the challenges of the times. “It is not an end-all or a solution to everything if you have no deficit,” he said.
Businessman Donald Dee agreed. “The important thing is to show we are handling our finances responsibly. If there are some deficits brought about by shocks in the economy, principally the increase in crude-oil prices, obviously that should be acceptable.”
At the end of the day, that just seems to be the appropriate mindset after all.
