NextGen Day

The impact of a potential slowdown in GDP, high inflation, and the Bangko Sentral ng Pilipinas’ (BSP) rate tightening cycle is anticipated to hinder the government’s budget consolidation in part.

In a report released on Friday, Fitch Solutions Country Risk and Industry Research updated its estimate of the country’s budget deficit for this year, moving it up from 6.1 percent of GDP to 6.4 percent.

“The Philippines is still pursuing budgetary consolidation, but more gradually. We believe that a more significant reduction in the budget deficit in 2023 is unlikely as a result of the slowing economy and high level of spending, it added.

Potential domestic output slowdowns “will be a key source of fiscal pressures” this year, according to Fitch Solutions.

The gross domestic product (GDP) estimate for this year is 5.9 percent, which is less than the forecasted 7.6 percent figure for 2022.

“High domestic inflation, weak external demand, and aggressive monetary tightening undertaken by the BSP will constrain economic growth and inevitably weigh on the public coffers,” it continued.

From May 2022 to March of this year, the BSP increased its benchmark interest rates by a total of 425 basis points in an effort to combat the high and persistent inflation rate in the nation.

According to the analysis, the further lowering of tax rates for people in the lower-middle income group would have an influence on government revenues, which are predicted to grow by just about 4% this year rather than by 18% annually in 2022.

According to the report, the government’s effort to maintain higher infrastructure investment will have an impact on fiscal consolidation because it expects the ratio of domestic expenditures to GDP to increase from its pre-pandemic level of 17.6 percent to an average of 19.8 percent by 2027.

“To achieve his (President Ferdinand Marcos Jr.) goal of maintaining growth at 6.5 to 8 percent, the Marcos administration has signaled that it will maintain an accommodative fiscal stance throughout this presidential term, which spans the period of 2022-2028,” it stated.

According to the report, Marcos’ ambitious intentions to make the Philippines a top investment destination will be greatly aided by improvements in the infrastructure.

“Despite a wider-than-expected deficit, we note that the budget shortfall is still on a narrowing trend, which will bode well for the country’s fiscal sustainability,” it continued.

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