Gov’t seen in a position to spend more for Visayas

The government can take advantage of its fiscal space to spend on rehabilitation efforts that would jump start Visayas’ economy, following the devastation inflicted by Supertyphoon “Yolanda” last month.

However, Swiss financial giant UBS said policymakers should remain mindful of keeping the government’s deficit in check so as not to derail consolidation efforts that began at the start of the Aquino administration in 2010.

“The Philippine government can and is in a position to spend more,” UBS senior economist for Southeast Asia Edward Teather said in a conference call Thursday.

“Rating agencies and commentators would look positively on spending efforts by authorities. Consolidation could take a break in 2014 as spending is wrapped up for that purpose,” Teather told reporters.

From about 3.5 percent of gross domestic product (GDP) in 2010, the Aquino administration has been on a mission to bring the country’s deficit to about 2 percent of domestic output by 2016.

The government plans to do this without raising income or sales taxes, and while increasing spending on infrastructure to about 5 percent of GDP to prop up economic growth to an average of 6 to 7 percent in the medium term.

To achieve this, the government successfully pushed for an increase in excise taxes. The Bureau of Internal Revenue (BIR) has also intensified its campaign to run after tax cheats.

These gains, together with the administration’s campaign against corruption in the government, helped the country earn investment grade ratings for its sovereign debt from the world’s three major rating agencies.

UBS’ Teather noted, however, that much of the government’s recent success in improving its finances were due to easy monetary settings in developed markets like Europe and the United States. This pushed investors to emerging markets in Asia, bringing down interest rates that made it cheaper for the Philippines to borrow money to bankroll its fiscal stimulus.

The flood of cheap money from overseas also helped fuel lending growth in the Philippines and other Asian markets since 2009, which was the start of the US Federal Reserve’s massive bond-buying program.

UBS expects the US Fed to start scaling back its $85-billion bond buying program in January. “The direction of that policy will turn … and will bring growth rates down to more normal, historical levels,” he said.

“One of the reasons revenue has risen is high growth. It’s possible that some of those gains was due to growth that is temporarily very strong,” Teather said.

“It might not be sustained going forward. The government has reason to spend. But the government has to be careful and keep consolidation at the back of its mind,” he said.

With this tap of liquidity expected to dry up next year, Teather said growth in Asian markets might start to moderate, although this might be partly offset by a pickup in the manufacturing sector as better conditions in developed markets seen leading to higher demand for the region’s exports.