July 17, 2022 | 5:36 pm
I am
pleased to share with readers a post that Christine Tang and I wrote for
Globalsource Partners (globalsourcepartners.com) subscribers on the
Philippines fiscal outlook. We are their Philippine Advisers.
Last
Friday, the Development Budget Coordination Committee (DBCC), an inter-agency
body made up of the departments of budget, finance, planning and the BSP
(Bangko Sentral ng Pilipinas), presented the new administration’s fiscal
program for 2022 to 2028. The medium-term program hinges on the economy
sustaining its growth clip at 6.5% to 8% starting 2023 and inflation returning
to the BSP’s 2% to 4% target starting 2024.
Given
nominal GDP growth of 9% to 10%, the fiscal program aims to reduce the overall
national government (NG) budget deficit, which reached 8.6% of GDP last year,
by 1 ppt every year until it falls to 3% of GDP, the pre-pandemic deficit
target. With this performance, it expects the NG debt ratio, which is
anticipated to creep up to 61.8% of GDP this year, to gradually drop to 52.5%
of GDP by the end of the administration.
The
reduction in the deficit and debt ratios to GDP will be done through a
combination of raising revenues and cutting expenditures relative to GDP. The
revenue effort is programmed to rise from 15.5% last year to 17.6% by 2028 or
an increase of 2.1 ppt, while spending as a share of GDP is programmed to fall
from 24.1% last year to 20.6% in 2028, equivalent to a decrease of 3.5 ppt.
Despite the reduction in expenditures, government intends to keep
infrastructure spending at 5% to 6% of GDP.
OUR VIEW
As far as
the numerical targets are concerned, the latest medium-term fiscal program is
basically an extension of the last one, crucial mainly in terms of signaling to
markets that the new administration is committed to pursuing fiscal
consolidation. The 2028 target for the debt ratio, i.e., 52.5% of GDP, is
certainly more realistic and supportive of post-pandemic recovery needs, than a
promise of quickly paring it to the pre-pandemic ratio of 39.6%.
We are
looking forward to the nuts and bolts of the fiscal program, particularly:
1. New
economic growth drivers that will keep the medium-term GDP growth rate at 6.5%
to 8%, an ambitious target for the post-pandemic period especially with the
lingering effects of the pandemic, the many external headwinds (end of cheap
credit, elevated commodity prices, slowing global economic growth) and
government’s more limited macro policy space (both fiscal and monetary) to
support domestic consumption and investments.
We note
that the 6% growth target for goods exports is itself unaspiring, especially in
light of the new laws liberalizing foreign investments.
2.
Sources of new revenues that will keep revenue growth above nominal GDP growth
from 2023 onwards. The Finance secretary said recently that the economic team
will pursue the remaining tax packages of the Duterte administration, dealing
with property valuation and financial sector taxation which, while revenue
neutral, will make the tax system more efficient. He is also in favor of
imposing taxes on digital transactions but did not specify expected revenue
inflows.
3.
Expenditure reforms that will create space for continuing social protection
programs, especially in health and education, and maintaining infrastructure
spending at 5-6% of GDP, even as government pared its overall spending as a
share of GDP. The budget for military pension liabilities alone is expected to
take up about 1% of GDP annually during the term of this administration.
We await
the President’s State of the Nation Address later this month where he is
expected to present his administration’s economic program.
End.
POSTSCRIPT:
Although
we expect GDP growth this year to reach 6.8% (driven by base effects and
election spending), we think the government’s 6.5% to 8% growth target through
2028 is rather ambitious.
My own
gut feel is medium-term growth potential is now much lower, closer to 4-5%, the
long-term Philippine growth rate rather than the 6-7% of the past decade
pre-pandemic. As mentioned in our post, this is because of the drag from
scarring from the pandemic (closed businesses, education, and labor mismatches)
and considering the end of decade long credit cycle (cheap credit), elevated
inflation everywhere affecting consumption and investments, global economic
slowdown, even risk of recession, and government’s more restricted fiscal
space.
But I
would like this government to prove me wrong. The way I think it can do this is
if it can quickly earn investors’ trust to attract more FDIs, especially job
creating ones, and revive PPP (public-private partnerships) as a way of
sustaining infrastructure investments, including digital ones. Moving us
towards more investment rather than consumption driven growth.
On PPP,
there are immediate to do’s:
1) Signal
respect for sanctity of contracts and the rule of law by complying soonest with
the terms of the MWSS concession agreements and the international arbitration
ruling. (See the column of National Scientist and UP Economics Professor Raul
Fabella https://bit.ly/Fabella060622).
2) Scrap
the midnight revisions on IRR (implementing rules and regulations) on
build-operate-transfer (BOT) projects and PPPs. The flawed revisions include
overly restrictive MAGA coverage (material adverse government action), and
removal of provisions on parametric formula for rate setting, and on
international dispute settlement. (Please see the Op Ed that summarizes the
specific concerns of the Foundation for Economic Freedom and the Makati
Business Club https://bit.ly/BOT_amendments ).
Romeo L.
Bernardo was finance undersecretary from 1990-96. He is a trustee/director of
the Foundation for Economic Freedom, Management Association of the Philippines,
and FINEX Foundation. He is Philippines principal adviser to Globalsource
Partners
romeo.lopez.bernardo@gmail.com
