The next Philippine president may walk a fiscal tightrope this year, with public debt likely to surge to 62.9 percent of the country’s total economic output this year, think tank Fitch Solutions said.
“We at Fitch Solutions flag the challenge the next president will face from the deterioration in the Philippines’ fiscal position during the pandemic. While there is a need to support the Philippine economic recovery given the loss of employment and economic output due to the pandemic, the prioritization of growth over deficit consolidation in 2022 could leave the next president facing fiscal challenges,” the think tank said in a Jan. 12 research note. In 2019, before the pandemic caused twin health and economic crises, the country’s public debt to gross domestic product (GDP) ratio was just at 39.6 percent.
Last year, the target was to cap the public debt at 59 percent of GDP even as it borrowed more to fund COVID-19 intervention measures. Fitch Solutions projected that the Philippine government’s budget deficit could narrow from an estimated 8.3 percent in 2021 to 7.9 percent this year. However, this would still be much higher than the prepandemic average of 2.4 percent from 2015 to 2019.
Rebounding revenues on the back of the economic recovery will offset the expansion fiscal spending as the government seeks to accelerate economic recovery this year, Fitch Solutions said.
However, it said the wide deficit would add to fiscal pressures facing the next president.
Borrowing costs
“Government bond investors may become increasingly concerned about the surge in public debt, especially if they believe that further public debt increases are likely. In turn, this could see borrowing costs rise over the coming years,” the research said.
So far, the Philippines’ fiscal outlook had not led to a significant increase in borrowing costs, with the Philippines’ risk premium—as shown by the credit default swap spread—down from 2020 highs.
On the P5-trillion 2022 national budget signed by outgoing President Duterte, Fitch Solutions said this was larger than it had previously expected, given its view that the government would begin to prioritize fiscal consolidation. With the pandemic threat to the Philippine economy still significant and the economy yet to recover to prepandemic output levels, it noted that policymakers had opted to continue fiscal support.
Fitch Solutions projected expenditures to grow by 11.2 percent this 2022.
Revenues, however, are expected to grow at a faster pace of 14 percent from an expected growth of 7 percent last year, reflecting a stronger economic recovery.
Easing restrictions
The think tank expects the country’s economic growth to accelerate from an estimated 4.5 percent in 2021 to 6.5 percent in 2022. It expects easing mobility restrictions to boost domestic activity, which should in turn boost tax receipts.
While the more contagious Omicron variant remains a prominent threat to the economy, Fitch Solutions expects growth to come in stronger than in 2021 and economic activity to broadly normalize over the course of the year.
“As such, while the budget continues to provide economic stimulus, revenue growth should be such that the overall deficit narrows in 2022,” it said.
While it expects a slight narrowing of the fiscal deficit as a ratio of economic output, Fitch Solutions said risks remained from the continued pandemic threat to revenues. As such, it believes the Philippine government could come under some pressure to speed up fiscal consolidation plans given the sharp rise in public debt levels during the pandemic.