MANILA, Philippines–The Supreme Court’s partial reversal of the Disbursement Acceleration Program ruling bodes well for the Philippine economy as it could pave the way for greater government spending after the sharp cutback in spending last year, an economist from British banking giant HSBC said.
Hong Kong-based HSBC economist Trinh Nguyen, in a research note, said the latest SC ruling could bring the Philippines’ gross domestic product (GDP) growth to a faster pace than the bank’s forecast of 5.4 percent this year.
After underspending in 2014 due to the SC’s ruling in July that declared portions of the Disbursement Acceleration Program (DAP)—a mechanism mapped out to speed up government spending—unconstitutional, Nguyen said fiscal spending could rise by more than 30 percent this year.
But even with the upside surprise, Nguyen said the government might still underspend the budget for this year.
“Despite the good news, the BSP (Bangko Sentral ng Pilipinas) will remain vigilant and keep monetary conditions accommodative,” she said.
The new ruling, the economist said, could “potentially give space for the government to kick fiscal spending into high gear in 2015.”
“We expected fiscal spending to pick up in 2015 and its contribution will be larger in 2015 due to a favorable base effect. However, given this decision, there is upside risk to our base case assumption of over 8 percent (increase in) government expenditure. If the government spends the entire P2.6 trillion allotted for the year, then fiscal expenditure may rise by more than 30 percent,” she said.
But while this ruling would provide some upside, Nguyen cautioned that the Philippine public sector historically had difficulties pushing out spending and investment. She noted that in 2011, sluggish fiscal spending, which then rose by only 2.3 percent, had caused GDP to slow to 3.7 percent.
The DAP was introduced by the Aquino administration in 2012 to speed up spending. As a result, fiscal expenditure expanded by 14.1 percent that year, pushing GDP growth to 6.8 percent. She noted that even as government spending subsequently slowed to 5.8 percent in 2013, the state still contributed close to 1-percentage point to the 7.2 percent growth that year.
When the SC struck down the DAP in July, Nguyen noted that spending contracted in the third quarter of 2014 and picked up in the fourth quarter 2014.
For the full year 2014, fiscal spending had risen by 1.8 percent, contributing a mere 0.2 ppt to the 6.1 percent growth.
“Given the Philippines’ favorable demographic transition and rapid growth of income, spending on and investment in soft and hard infrastructure should increase to achieve rapid growth rates. The Philippines certainly has the private consumption side to growth—which has historically been very stable, thanks to its demographic transitions, low household debt and steady inflows of remittances. Should fiscal spending and investment kick in, then growth should be very robust,” Nguyen said.
But as history shows that spending tends to be conservative, if not disappointing, HSBC expects the central bank to keep rates on hold at the upcoming meeting as well as the rest of the year.
Based on the latest ruling, the SC eliminated the prohibition on “funding of projects, activities and programs that were not covered by any appropriation in the General Appropriations Act.” However, it also maintained that the following are illegal: withdrawal of unobligated allotments from implementing agencies and declaration as “savings” of withdrawn unobligated allotments and unreleased appropriations before the end of the fiscal year; cross-border transfers of savings from the executive (branch) to augment appropriations of other offices; and use of unprogrammed funds despite absence of the National Treasurer’s certification that revenue collections exceeded targets.