IMF: Philippines has room to support economy

MANILA, Philippines — The International Monetary Fund (IMF) said the Philippines has fiscal space to provide more support to the economy amid the impact of the COVID-19 pandemic.

Yongzheng Yang, IMF resident representative to the Philippines, told The STAR the country entered the pandemic with considerable policy buffers, including a level of public debt that was well below the average of emerging markets.

“Given this relatively low level of debt, the Philippines has fiscal space to provide further support to the economy if needed. The policy buffers were built with the aim for use in economic downturns like the current one,” Yang said.

Yang said the government and the Bangko Sentral ng Pilipinas (BSP) have rightly used the buffers since the onset of the COVID-19 pandemic.

“Of course, over the medium and long term, a credible strategy will be needed to consolidate the government’s fiscal position to ensure that debt is sustainable,” Yang said.

According to the IMF, debt levels are rising worldwide as a result of the pandemic.

Due to slowing economic activity or outright recessions, Yang pointed out revenue collections by governments are declining while expenditures are rising.

“Given this, most governments have to borrow more to finance their expenses to support their economies,” Yang said.

Based on the October 2020 Fiscal Monitor of the IMF, the budget deficit of the Philippines is seen swelling to 8.1 percent of GDP this year from 1.8 percent of GDP last year before narrowing to 7.3 percent in 2021, 6.3 percent in 2022, and 6.2 percent in 2023.

The multilateral lender sees the tax take of the country declining to 17.2 percent of GDP this year from 19.9 percent of GDP last year before improving to 17.5 percent in 2021 and 17.7 percent in 2022 and 2023.

On the other hand, government expenditures are seen rising to 25.3 percent of GDP this year from 21.7 percent of GDP last year before declining to 24.8 percent in 2021, as well as 24 percent in 2022 and 2023.

Economic managers, through the Development Budget Coordination Committee (DBCC), are now looking at a wider budget shortfall of 9.6 percent of GDP, or a record P1.82 trillion, instead of only 8.4 percent of GDP this year due to the impact of the COVID-19 pandemic on revenue collections.

The shortfall is expected to narrow to 8.5 percent of GDP in 2021 and to 7.2 percent in 2022.

The Philippines is set to borrow P3 trillion this year and another P3 trillion next year from both domestic and foreign creditors to finance the swelling budget deficit, translating to a higher debt-to-GDP ratio of 53.9 percent in 2020 and 58.3 percent in 2021 from 39.6 percent in 2019.

The BSP has been doing the heavy lifting to soften the impact of the COVID-19 pandemic into the economy. Its response measures, including the 175-basis points cut in interest rates, the lowering of the reserve requirements for banks, the P540 billion provisional advance to the national government, the P300 billion repurchase agreement with the Bureau of the Treasury paid last September, and the purchase of government securities in the secondary market have unleashed P1.9 trillion into the financial system.

The central bank also continues to build up the country’s foreign exchange buffers with the gross international reserves (GIR) hitting an all-time high of $100.44 billion in end- September, equivalent to 10 months’ worth of imports and nine times the country’s short term external debt.

The IMF expects the Philippine economy contracting by 8.3   percent this year before bouncing back strongly with a growth of 7.4  percent next year.