New PH targets not a sign of fiscal loosening – HSBC

REEVISIONS to the country’s macroeconomic assumptions do not signify a relaxation of fiSCAL POLICIES, THE RESEARCH UNIT OF BANKING giant HSBC said.

“Despite widening the fiscal deficit assumption in the next 5 years, we do not think this change represents any indication of fiscal loosening or, in a more general sense, fiscal imprudence,” HSBC Global Research economist Aris Dacanay said in a commentary.

“This is because the wider fiscal deficits are a result of lower assumptions for growth and not higher expenditures,” he added.

Earlier this month, the country’s economic managers decided to revise its macroeconomic assumptions given trade and geopolitical headwinds.

The 2024 gross domestic product (GDP) growth goal was cut to 6.0 to 7.0 percent, from 6.5 to 7.5 percent previously, while that for 2025 was narrowed to 6.5 to 7.5 percent from 6.5 to 8.0 percent.

Other macro metrics also changed.

For the fiscal program, the Development Budget Coordination Committee (DBCC) raised this year’s revenue projection to P4.27 trillion from P4.23 trillion.

Figures for the next three years were also trimmed. The revenue estimate for 2028 was set at P6.08 trillion.

Spending for the medium term was also raised.

This resulted in higher budget deficit assumptions for the next 5 years, with the projected shortfall for 2028 at P1.37 trillion.

Dacanay explained that when GDP growth is lower, it leads to a smaller tax base and reduced government revenue while also increasing the “fiscal deficitto-GDP” ratio due to a smaller denominator.

“That said, there is no change in fiscal policy here. It is just an incorporation of the fact that times are still harder than usual,” he added.

He noted that with the current pace of consolidation, the fiscal deficit-to-GDP ratio was projected not to return to pre-pandemic levels even by the end of the Marcos administration, which contrasts sharply with the earlier Medium-Term Fiscal Framework that aimed for normalization by as early as 2027.

The deficit is projected to decline from 6.2 percent of GDP last year to the pre-pandemic level of 3.7 percent by 2028 from the previous 3.0 percent.

Dacanay, meanwhile, noted that the government’s ambitious infrastructure agenda would necessitate importing crucial inputs, resulting in expanded current account deficits expected to persist above 2.0 percent of GDP until 2025 and requiring substantial foreign financing.

“Achieving macroeconomic stability is a balancing act,” Dacanay said.

“And we think that all these changes in assumptions by the DBCC not only represent tweaks to maintain balance in the economy but also support our view that the Philippines has entered a ‘higher for longer’ environment,” he added.

As for interest rate cuts, Dacanay said that this was likely to end at 5.0 percent.

He pointed out that keeping the policy rate above prepandemic levels will stabilize the Philippine peso, attract funding for major infrastructure projects, and assist in maintaining inflation within the central bank’s target range of 2.0 to 4.0 percent.