Monday, 21 December 2009

Experts: Deficit woes not that bad

Erik de la Cruz
Business Mirror

THE Philippines’ fiscal position continues to deteriorate but analysts at some of the biggest banking institutions believe the country is not in a worrisome situation yet, if the budget deficit is to be viewed in the context of the current global economic crisis.

The large budget deficit this year and in 2010, according to Metropolitan Bank & Trust Co. (Metrobank), should not be viewed as a “market-destabilizing event,” because the country’s debt as a portion of the gross domestic product should remain relatively stable.

The numbers, Metrobank head of research Marc Bautista said, “will look absolutely horrible when viewed in isolation.” But the Philippines is not alone in spending beyond its revenue-generating capacity, he noted.

And given the global downturn, he said government spending—even at the point of incurring deficits—is considered a cure to a slump in demand, and there are too many countries out there doing the same thing to support their economies.

Philip Wee, a currency strategist at DBS Bank, said the widening budget gap has not dampened sentiment toward the peso, which on Friday was up almost 2 percent thus far this year at 46.61 to the dollar from its end-2008 level of 47.52.

Throughout 2009, he said, DBS had been more cautious than optimistic about the peso. “As a long-time observer of the peso, it was not easy to overcome the worries that normally accompanied missed fiscal targets.”

But looking into 2010, he said, “it is probably time to turn more optimistic” about the peso and take into account other factors that point to “stronger Philippines” today, such as its steadily rising external liquidity.

Wee said since 2006 the country’s current- account surpluses have consistently exceeded budget deficits, which also did not add to external debt burden. More important, he said foreign reserves continue to surge to new highs, reaching $43.7 billion as of end-November.

 If such pace of accumulation is sustained, he said the reserves may surpass the country’s external debt of  $51.8 billion as of end-June as early as the second half of 2010.

The positive comments came ahead of the release this week of the January-November budget deficit report.

The cumulative deficit covering the January-October period reached P266 billion, surpassing the full-year target of P250 billion, and the government said the worst-case scenario for 2009 is for the deficit to hit P300 billion, barring more negative surprises on revenue and without the sale of state assets.

According to Bautista, it looks like the markets have already factored in a deficit figure close to the P300-billion level.

“Our own forecast is a number between P320 billion and P330 billion. But at this point, that would not be much of a surprise given the latest official deficit estimates,” he said. The full-year number will come out early next year and by that time, he said there would hardly be any impact at all on investor sentiment.

But he pointed out “the deterioration is pretty obvious, and yes, things have taken a turn for the worse, but they’re not that worrisome yet.”

While P300 billion looks large in absolute numbers, he said it has to be viewed in the context of GDP. “Taking a look at the fiscal balance-to-GDP ratios for the Philippines, we see that the 2009 year-end estimate, although bad, is not the worst ever.”  

The focus is now shifting to what the deficit number will be in 2010, analysts said.

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