‘Legacy’ spending for Visayas rehab to boost GDP growth

Government spending for post-Super Typhoon “Yolanda” reconstruction and rehabilitation—deemed a “legacy” fiscal spending at the twilight of President Aquino’s term—may help perk up the domestic economy with a potential annual income gain of P94.3 billion over the next three years, a Citigroup economist said.

In a research note dated Nov. 14 titled “Aquino’s ‘Legacy’ Spending Starts with Reconstruction Program,” Citi economist for the Philippines Jun Trinidad said the P57 billion in annual fiscal spending under the rehabilitation program could boost domestic output growth by 0.74 percentage point assuming there would be no slippage.

“On a three-year cumulative basis, we can be assured of an additional GDP (gross domestic product) growth of 2.2 percent. In peso terms, we estimate potential income gain of P94.3 billion for every P57 billion annual spend for a multiplier parameter of 1.65x,” Trinidad said.

As fiscal spending results in extra income, this leads to more spending, which creates a new cycle of spending and increased income. The multiplier effect cited by Citi projects an increase in final income of P1.65 arising from every P1 in new injection of spending.

“We may be seeing a start of ‘legacy’ fiscal spending with reconstruction/rehabilitation program of regions devastated by Yolanda as we near the end of President Aquino’s term,” Trinidad said.

The economist said the government’s fiscal expenditure shortfall could still be reversed even with the constraints on the Disbursement Acceleration Program (DAP) that was stalled by the Supreme Court decision with the the untangling of legal issues governing recently awarded public-private partnership (PPP) projects and other 2015 budget priorities.

Based on the pipeline of infrastructure projects, post-Yolanda rebuilding and other fiscal spending priorities, Trinidad said there would likely be a hefty spending gain next year, reversing the primary expenditure slippage of about P255 billion or 2 percent of GDP seen in the first nine months of this year. If so, he said this would “establish an infrastructure legacy that sustains investment-driven growth.”

“Legacy spending, if it happens, could mitigate downside risk from the second quarter 2015 power crisis while fast-tracking recovery of Eastern Visayas’ GDP, equal to 2.2 percent of national output, which was lost to Yolanda’s fury,” Trinidad said.

The reconstruction and rehabilitation program over a three-year span covering Eastern Visayas and nearby regions devastated in November last year by Yolanda (International name: Haiyan) is broken down as follows: Infrastructure budget of P35.1 billion, social service program of P26.4 billion, resettlement budget of P75.7 billion and livelihood projects worth P33.7 billion. The government claims to have spent P37.4 billion under the recovery program. Trinidad noted that average annual fiscal expenditures devoted to the rehabilitation program were P57 billion or at least 2 percent of the government’s annual budget, with the bulk coming from non-infrastructure components.

This multiyear budget program gives assurance of regional rehabilitation and reconstruction in the affected areas through 2016 when Filipinos elect the next president. The economist noted that infrastructure projects under the Yolanda program initiated months before the May 2016 elections would not be subject to the “election ban.”

Based on funding already spent for Yolanda rehabilitation, the economist noted that among the production sectors, public administration and other government services expanded the most, which he said was a foregone conclusion since the bulk of the program budget implementation could be traced to this sector. The construction sector chalked up a 2.2-percent gain mainly coming from the planned infrastructure component.

Trinidad noted that potential gains from higher fiscal spending incurred by services: Transport, storage and communications (0.4 percent), financial intermediation (0.85 percent), and real estate, renting and business services (0.38 percent) had exceeded possible manufacturing upside (0.24 percent).

“We believe the multiplier effect of increased fiscal spending would be ‘internalized’, benefiting domestic market-oriented industries,” he said.