Gov’t set to rev up spending, says Deutsche Bank

The government is expected to make one last push to leave a lasting impression on the domestic economy with a sharp acceleration in spending—focused on infrastructure and social services—ahead of next year’s elections.

Spurred by the desire to sway voters, the Aquino administration will seek an end to two years of underspending this year, providing a boost to economic growth, Deutsche Bank said in a note this week.

“A change in leadership is forthcoming, with elections taking place in May 2016. And this is likely to pressure [President Aquino] to push for spending, especially toward infrastructure if he wants to leave a favorable mark on the country,” Deutsche economist Diana del Rosario said.

Despite ambitious goals to ramp up spending, the government failed in the last two years to live up to its own targets.

For instance, in 2014, infrastructure spending fell short of the 3.2 percent of gross domestic product (GDP) targeted by the state. This came during a year when expectations were high due to the need for bigger outlays for Yolanda-hit provinces.

This year, the government wants infrastructure spending to reach over 4 percent of GDP, with a bump to 5 percent of GDP planned for 2016.

Deutsche said the government’s success in hiking spending may help offset a likely slowdown in private consumption—a result of tighter funding conditions.

Private construction, buoyed by cheap credit and strong demand from new home owners and business process outsourcing firms, accounts for about a tenth of GDP.

The bank said construction may slow in the months ahead as interest rates head upward, and amid recent restrictions imposed by the central bank on real estate lending.

“If we assume half of that increase in GDP share will recede with rising borrowing costs, then the drag to growth can perhaps be compensated by the government’s plan to shore up infrastructure spending,” del Rosario said.

Other risks to the economy include weak demand for Asian exports due to soft conditions in advanced markets, and drier weather as a result of the El Niño phenomenon, Deutsche said.