Gov’t spending dictates GDP track – ING

MANILA, Philippines - A triple dip in government spending and a rebound at the end of each quarter is the developing pattern in the Philippine economy, said ING Bank.

The ING Bank is a member of the ING Group, a Dutch multinational banking and financial services corporation headquartered in Amsterdam.

ING Bank senior economist Joey Cuyegkeng said this pattern was observed in the fourth quarter, in the second quarter, and now likely in the third quarter.

Cuyegkeng observed that without the surge in government spending in June this year, overall gross domestic product (GDP) growth in the second quarter would be slower, likely to be in line with the prevailing consensus of 5.9- to 6.1 percent instead of the upside surprise of 6.4 percent.

Government officials mentioned that the weakness in spending in April and May had to do with delays in the submission of new requirements in the 2014 General Appropriations Act (GAA) and ongoing validation of proposed program to respond to the rehabilitation and reconstruction of typhoon affected areas.

“With the rebound in June spending, we had assumed that government had finally addressed the issue. But here we are again, July spending dropped 15-percent year-on-year (YoY). Spending excluding interest payments showed a 16.6-percent YoY drop,” the economist said in a report. 

Fiscal performance as the deficit is concerned shows significant outperformance.

Government deficit in July amounted to only P1.8 billion bringing the seven month deficit to only P56 billion, which is just around 21 percent of this year’s deficit target.

July revenues increased by 15-percent YoY with the Bureau of Internal Revenue (BIR) collections posting an almost 20-percent growth, while Bureau of Customs (BoC) collections were 10 percent higher YoY.

But for the seven-month period overall revenue growth is a moderate 12 percent with BIR and BoC collections posting a 10 percent and 18 percent YoY growth, respectively.

These seven-month growth in collections was roughly around half of the targeted pace.

“The outperformance of the fiscal deficit is largely a result of weak spending, which may weigh on overall 2014 growth if the pattern of an end-quarter surge does not happen in the third and fourth quarters,” Cuyegkeng said.

Money supply, or M3, growth eased to 18 percent for July. But loan growth next of reverse repos (RRPs) continue to rise bringing the loan to M3 ratio to around 63 percent.

Before the special deposit account (SDA) phase out starting July last year this ratio was around 70 percent.

“We remain wary of the implied excess liquidity in the system (even as M3 growth slows to low teen by October – November) this year,” the economist warned.

As inflation accelerates, some of the excess liquidity would be used for spending and generate some amount of demand/pull pressures on inflation.

Added liquidity provided a boost to overall economic activities as financing costs remained affordable, despite the tightening of monetary policy since March of this year.

Loan growth accelerated from the low teens in 2013 to around an average growth of 20 percent for the seven-month 2014 period.

Tightening has seen SDA levels rise to P1.2 trillion in July, an almost P50-billion increase month-on-month but a P570 billion drop YoY. 

“BSP is expected to continue with its tightening in the next 12-18 months to address inflation concerns and possible volatilities with the normalization of US monetary policy,” Cuyegkeng added.