The next CEO of the Philippines will have to grapple with “twin deficits” that may return this year, as the government spends more to rebuild the economy and the demand for foreign exchange expands with the resumption of investment spending coming out of a prolonged pandemic.
This is according to JP Morgan economist Nur Raisah Rasid, who sees a return to twin deficits—referring to a simultaneous deterioration in the government’s budget position and widening of the country’s current account deficit as foreign exchange transactions with the rest of the world increase.
“A repeat of the fiscal expenditure push at the height of the 2015-2018 episode could find the Philippines grappling with the spillovers on FX (foreign exchange) and rates without proper policy implementation that mitigates these impacts,” Rasid said in a research note issued last week.
The commentary, titled “Philippines: Challenges await for the next administration” said the key near-term issues would thus include managing the twin deficits while being mindful of spillovers to domestic financial conditions, fiscal and debt management, as well as proper budget execution.
‘Uphill battle’
“In the longer run, we think decisive reforms that address job creation, wage growth and education will be key in determining the medium-term course of the economy and for the Philippines to attain its aspiration to reach middle-class status by 2040,” she said, adding this would be an “uphill battle” for the next administration.
As a result of the COVID-19-related surge in fiscal spending, JP Morgan estimated that Philippine government debt had soared to 59.1 percent of gross domestic product (GDP) at the end of 2021, and could rise further to 62.3 percent by the end of this year.
“While this debt burden is nowhere near the all-time high of 74.4 percent of GDP recorded during the early days of the Arroyo administration, which culminated in fiscally prudent strategies over the subsequent years, we expect debt ratios to decline faster for BBB-rated peers this year, trends that markets will be watching closely,” she said.
The Philippine government is currently rated one notch above minimum investment grade by both Moody’s (Baa2) and Fitch (BBB with negative outlook) and two notches above the minimum by Standard & Poor’s (BBB+).
Rasid said the next administration would likely pursue an expansionary fiscal policy to support the ongoing recovery, alongside the parallel decline of external balances, raising concerns over fiscal and monetary policy management.
On the monetary side, JP Morgan believes the local central bank would likely tolerate growth-induced peso weakness up to a point—beyond which it would be challenging to retain the easy monetary policy that aims to support a sustainable growth recovery.
This year, the current account balance is seen to deteriorate anew as imports improve as institutions resume their investment spending.
“Broader fiscal spending consolidation likely will require time, but raising overall tax revenues by fostering compliance and reducing tax administration costs could accelerate the process,” Rasid said. INQ