Philippines needs to spend more – Fitch

MANILA, Philippines — The Philippines needs to spend more to soften the blow of the COVID-19 pandemic as the health crisis drags on, stalling economic recovery, according to Fitch Ratings.

In a research note titled “New lockdowns may further erode the Philippines’ rating buffers,” Fitch said it is becoming more difficult for the national government to curtail spending as COVID-19 cases continue to soar.

“The government’s record of macroeconomic management lends credibility to the projections, but curtailing pandemic-related spending may be difficult if the economy continues to contract and fails to recover as fast as the authorities expect. If the recovery stalls, there may be pressure for even more fiscal stimulus,” Fitch said.

The Philippine economy   contracted by nine percent in the first semester after shrinking by a record 16.5 percent in the second quarter due  to the pandemic.

“We will continue to assess the authorities’ ability to adhere to the fiscal consolidation plans in their medium-term framework. Our baseline assumption that public debt will remain below the peer median level remains subject to risks, particularly those associated with the pandemic,” Fitch said.

The debt watcher said it would assess the extent to which the crisis may affect the Philippines’ strong medium-term growth potential which has supported the country’s rating.

“Our forecast that the Philippine economy will contract by four percent in 2020 now appears optimistic and is likely to be revised down,” it said.

According to Fitch, the continued spread of COVID-19 has necessitated renewed lockdown measures in and around Metro Manila, further depressing economic growth by much more than anticipated.

“However, despite a weakening in the country’s public finances amid the pandemic shock, some fiscal headroom remains at the current rating level owing to its low public-debt position going into the crisis,” Fitch said

The Development Budget Coordination Committee (DBCC) is looking at a wider budget deficit of P1.81 trillion or 9.6 percent of GDP this year from P660.2 billion or 3.4 percent of GDP last year.

Government disbursements are expected to grow by 14.2 percent to P4.33 trillion this year from P3.79 trillion last year, while revenues may plunge by 19.7 percent to P2.52 trillion from P3.14 trillion.

Nicholas Mapa, senior economist at ING Bank Manila, said the national government has stashed away P824 billion at the Bangko Sentral ng Pilipinas (BSP) as of June in anticipation of the need to build a war chest amid the pandemic.

The savings include P763 billion   from a slowdown in government spending due to the delayed passage of the 2019 national budget as well as P159 billion from its savings as of end last year.

“The government faces a challenge of deteriorating fiscal position with the budget deficit now expected to crest nine percent in 2020 as revenue streams dry up and the general economy crumbles. The national government’s savings account, however, remains at healthy levels,” Mapa said.

Likewise, Mapa added the Bureau of the Treasury (BTr) raised a record P516.3 billion from the recent sale of five-year retail treasury bonds (RTBs).

“With the national government’s deposit account projected to swell to P1.3 trillion, we now see the amount of muscle that the fiscal authorities can wield to battle the fallout from COVID-19,” Mapa said.