Discipline in stimulus spending underscored in boost to Philippines strategy
MANILA, Philippines — Prudence in stimulus spending must be observed by Southeast Asia and neighboring advanced economies to ensure debt levels are kept in check, a recommendation from regional economists that reflects the Duterte administration’s fiscally-controlled recovery strategy.
While inevitably coronavirus spending would lead to higher deficits and debts, economists at ASEAN+3 Macroeconomic Research Office (AMRO) suggested that policymakers must quickly employ a “credible medium-term plan” to get their budgets back to healthy levels once the health crisis is under control.
“The reduced fiscal policy space necessitates strong commitment to fiscal discipline and a credible medium-term plan to keep debt levels in check,” AMRO said in a working paper dated October 26 but released only on Tuesday.
“Once the pandemic subsides, regional economies must start rebuilding their respective policy spaces by prioritizing fiscal discipline and prudent debt management,” it added.
To a certain degree, AMRO’s recommendations backed up the Duterte government’s decision to control spending and deficit levels while critics called for larger public investments. Although at the same time, economists called for “swift” fund disbursement where Philippines has “more room to improve.”
As for spending plans however, AMRO also called for a “smooth” exit strategy from large stimulus to facilitate future “fiscal consolidation,” to which government’s current program has been consistent. For instance, the 9-month budget deficit barely amounted to half of this year’s increased limit of P1.82 trillion, also forecast to slowly go down by 2022.
Indeed, foreign borrowings of $9.9 billion as of October 2 already lumped the Philippines with China, Indonesia, Myanmar and Thailand where debt levels are “worsening somewhat” because of the crisis. AMRO echoed similar findings from Monday’s research of Moody’s Investors Service, a debt watcher.
On the flip side, COVID-19 is seen dealing “no significant change” in debt metrics of Hong Kong, Japan, South Korea and Singapore. But overall, liabilities are projected to rise across the region, albeit “remaining below 60%” of economic output. Manila’s ratio was at 48.1% as of June.
“When economies emerge from the current crisis, both public and private indebtedness are expected to increase significantly. The financial system is also likely to become more fragile owing to loan losses and impaired balance sheets,” AMRO said.
Beyond government budgets, central banks are also losing policy space to respond to future shocks after bringing down interest rates early in the pandemic. AMRO indicated “unconventional monetary policies” of negative interest rates and bond-buying may be employed, while being mindful of “unintended effects” such as financial instability and crowding out private firms for cash.
In the Philippines, the Bangko Sentral ng Pilipinas has lowered benchmark rates by 175 basis points this year to new record-lows, while lending the government over P800 billion, P300 billion of which had already been repaid.
Despite unprecedented interventions however, AMRO said governments should be prepared for long-lasting economic damage from pandemic in the form of joblessness and business closures. “The pandemic’s adverse impacts on the real economy are expected to be substantial and enduring,” it said.
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