Government set to lift budget-deficit ceiling

By Erik dela Cruz, Business Mirror

Posted at Feb 09 2009 12:25 AM | Updated as of Feb 09 2009 08:25 AM

Finance Secretary Margarito Teves on Saturday said the government is now poised to lift its budget-deficit ceiling this year from P102 billion, which is equivalent to 1.2 percent of the gross domestic product (GDP), and review its borrowing program and other macroeconomic assumptions.

“In the next two weeks, because of the very difficult conditions [in the global economy], we are likely to review our macroeconomic assumptions, so there’s a likelihood that the deficit ceiling...might be [raised],” Teves said during a forum at De La Salle University (DLSU) in Manila.

He told the BusinessMirror after the forum: “The deficit will be larger. Up to what extent, we still don’t know.”

Because “events are moving fast” and with the full impact of the global financial crisis on the domestic economy expected to be felt in the first half of this year, Teves said the need for the government to pump-prime the economy has become more urgent.

“If the deficit target will be different, then we need to look into the borrowing program and whether the borrowing mix will also be changed,” he said.

Teves said the Development Budget Coordination Committee (DBCC) will review other macroeconomic assumptions, taking into account the declining inflation and lower-than-projected oil prices. The DBCC is composed of the Department of Finance (DOF), the Department of Budget and Management, the National Economic and Development Authority and the Bangko Sentral ng Pilipinas.

Teves could not say whether the government would also need to revise its economic-growth target this year given the expected adjustments in the fiscal program. The government is aiming for a GDP growth of 3.7 percent to 4.7 percent this year, slashing the target from the original goal of 6.1 percent to 7.1 percent.

Last week the International Monetary Fund (IMF) warned of a more severe impact of the global financial crisis on the Philippines in terms of weaker remittances from Filipinos working abroad and export earnings.

The IMF now sees the country’s GDP growth slowing further to 2.25 percent this year from last year’s 4.6-percent expansion, which followed a three-decade-high growth of 7.2 percent in 2007.

Inflation slowed to a 10-month low of 7.1 percent in January and some economists expect the headline figure to be below 5 percent as soon as April as crude oil prices are seen falling further in anticipation of weakening global demand.

Bangko Sentral ng Pilipinas (BSP) Governor Amando Tetangco Jr. said last week the lower inflation rate in January “confirms our expectation for continued slowdown in price pressures and gives the central bank more room to support the economy and ensure there is sufficient liquidity for the efficient working of the financial markets.”

At the DLSU forum, BSP managing director Johnny Noe Ravalo said keeping liquidity in the financial system adequate and accessible to borrowers, which in the process will shore up market confidence, remains the main focus of the BSP.

Many economists said the disinflation trend in the Philippines may bring the headline figure close to zero later this year, providing greater leeway for the both the BSP and the national government to stimulate economic expansion through monetary and fiscal measures.

The BSP has slashed its policy interest rates by a total of 100 basis points between December and January, and economists expect further rate cuts of at least 100 basis points in the coming months.

Taimur Baig, director for Asia economics at Deutsche Bank, said that the financial markets already expect a widening of the Philippines’ budget deficit this year.

“I don’t think the Philippines will be penalized by the market because of a bigger budget deficit since there is a global consensus for the need for concerted action to support economies through fiscal measures,” he told the BusinessMirror recently.

But the question, Baig said, is whether the Philippines has the absorptive capacity to push up spending at a time revenue from taxes is expected to be weaker because of the economic downturn.

The government has come up with an economic-resiliency plan that involves spending up to P330 billion for infrastructure projects and social services. It hopes to create as many as 3 million jobs with this stimulus package.

During the forum at DLSU, which was organized by the school’s The Management of Financial Institutions Association and sponsored by several business outfits, including the BusinessMirror, Teves said P160 billion of the stimulus package represents additional spending for infrastructure projects, while P40 billion accounts for tax breaks.

Accounting for the P100-billion portion is a pooled fund also intended for infrastructure projects and which will come from contributions from some government financial institutions, including the Social Security System (SSS) and the Development Bank of the Philippines, and private financial institutions.

The P30-billion portion, Teves said, will be in the form of additional benefits to consumers from SSS and the Philippine Health Insurance Corp.

Teves also assured there will be no letup in the government’s campaign against tax evasion, smuggling and corruption in the revenue-generating agencies.

“To fund these pump-priming activities, the national government [NG] is continuously working for the improvement in its tax-effort ratio, or revenues collected from existing taxes over the gross national product or gross domestic product [GDP],” he said.

The goal is to raise the tax-effort ratio to 14.5 percent this year from 14.0 percent in 2008, he said.

Teves said the Executive department is also pinning its hopes for improved revenue collection on some measures that need congressional approval, such as the proposed increase in taxes on alcohol and tobacco products. The tax measure, he said, will have the biggest impact on revenue collection.

“We estimate an additional P19 billion to P22 billion in additional excise- tax collection will be generated from the first year of implementation [of the measure], P30 billion to P40 billion in the second year, P40 billion to P50 billion in the third year, and P60 billion to P70 billion annually thereafter,” he said.

Teves said the government could also sell more assets to raise additional revenue this year, but what assets to sell and the timing of the sale have yet to be determined.

“We’ll try harder [to raise more revenue] so that we can increase the level of spending,” he said. But any decision to sell assets will depend on “what the deficit numbers will be and to what extent the market’s response will be if we are to propose selling additional assets.”

“It’s hard to tell [when to sell] because the market right now is too soft. There’s a question of timing. So I think we can see the picture clearly once we, our working group at the DOF and my colleagues at the DBCC, go through this set of macroeconomic assumptions more carefully and suggest policy actions,” he said.

As regards the borrowing program, Teves said the national treasurer, the BSP and the DOF’s undersecretary for international finance will have to come up with a decision “in terms of the timing of availment [of any additional loans] if the deficit will be larger.”

Under the current program, the government is to borrow a total of about P510 billion this year, higher that the original progam of P437 billion which took into account a deficit ceiling of P40 billion.

About 24 percent of the current borrowing program would come from external sources while the balance is to be raised from the domestic market.

Last month the government raised $1.5 billion by selling 10-year bonds in the international market, an exercise that supposedly completed its external commercial funding requirement for this year’s deficit.

In a recent joint report, analysts and economists at First Metro Investment Corp. (FMIC)—the investment-banking arm of the Metrobank group—and University of Asia & the Pacific (UA&P) said the national government will likely incur a wider budget deficit of P180 billion this year.

This, the FMIC-UA&P team said, implies that the government will increase borrowings from the domestic market.

“The net domestic borrowing for the year could reach P172.5 billion, or around 2.1 percent of GDP. Thus, more NG debt papers are to be auctioned, and since we expect inflation to go below 5 percent by April, the BSP will likely continue to lower its policy rates,” it said.

“[A low inflation and low interest rate environment] makes us optimistic on the success of these future auctions,” the team said.