Budget deficit seen to widen next year

Fitch Solutions Macro Research expects the Philippines to incur a wider budget deficit next year as the 2020 national budget supports President Duterte’s desire to transform the country into an upper middle-income economy.

The unit of the Fitch Group said the Philippines may incur a wider budget shortfall of 3.5 percent of gross domestic product (GDP) for 2020.

“We anticipate the Philippines to run a wider budget deficit in 2020 than in 2019, owing to a greater reliance on government stimulus to drive economic growth,” Fitch Solutions said in a report.

Fitch Solutions said the higher shortfall is due to a greater reliance on government stimulus to drive economic growth.

“Despite the fiscal stimulus, the government’s fiscal position faces fairly low risk over the near term and we even see scope for further stimulus were the economy to face more severe headwinds in 2020,” it said.

In the second quarter, the country’s budget deficit clocked in at 2.3 percent of GDP, slightly lower than the 2.4 percent of GDP recorded in the same period last year.

“The narrower budget balance in the first half is attributed to strong revenue generation and delayed expenditure by the government, following the protracted process in passing the 2019 budget,” Fitch Solutions said.

The country’s GDP growth averaged 5.5 percent in the first half of the year, lower than the government’s six to seven percent target due to soft global markets as well as the delayed implementation of the national budget.

It eased to a four-year low of 5.5 percent in the second quarter from 5.6 percent in the first quarter.

“However, we expect fiscal stimulus to ramp-up toward the end of the year given the cash-based approach to the 2019 budget. The cash-based approach seeks to ensure spending is done within the fiscal year by setting a deadline of year-end for projects and contracts,” Fitch Solutions said.

For this year, Fitch Solutions expect a lower budget deficit of 2.8 percent of GDP from the original target of three percent of GDP.

“We expect expenditure to slightly undershoot the P3.66 trillion allocated budget given a likely increase in expenditure only in late 2019. However, the P4.1 trillion planned budget for 2020 will be close to fully allocated, and will represent closer to a 12.8 percent increase in expenditure rather than the government’s projection of 12 percent, given the lower than planned 2019 expenditure,” it said.

Given the cash-based approach to budgeting, infrastructure will receive strong public investment through 2020, which alongside continued efforts to attract foreign direct investment, could boost output capacity for the country over the coming years and support the Duterte administration’s target of six to seven percent real GDP growth rate.