Wider fiscal deficit seen to support Philippines recovery

MANILA, Philippines — The Philippines may run wide fiscal deficits in the near term to support full recovery from the pandemic-induced recession, according to Fitch Solutions Country Risk & Industry Research.

The research arm of the Fitch Group said the Philippines’ budget deficit may widen further to 7.7 percent of gross domestic product (GDP) this year after swelling to 7.6 percent last year from 3.4 percent in 2019 as government ramped up support measures and revenues dropped sharply due to the impact of the COVID-19 pandemic.

“We at Fitch Solutions maintain our forecast for the Philippines to run wide fiscal deficits in the near term as the government seeks to support the economy through the COVID-19 pandemic. Disruptions from the pandemic will weigh on revenues in 2021 and uncertainty will keep government expenditure growth elevated over the coming quarters,” it said.

It expects revenues to pick up pace in the coming quarters with a growth of 7.5  percent this year after slumping by nine percent last year.    

Fitch Solutions also sees expenditures growing by only  8.8   percent, slower than the original target of 10 percent  as spending is again being diverted away from infrastructure to support the government’s pandemic response.

For 2022, Fitch Solutions expects the budget shortfall to ease to 6.5 percent of GDP.

With the Philippines still facing waves of outbreaks and its relatively slow pace of vaccinations, Fitch Solutions said the economy may continue to need fiscal support through 2021 and 2022.

“We see limited risks from running wide deficits in the near term given the economy’s need for demand and investment. However, longer-term pressures on public finances will warrant a substantial tightening of fiscal support over the medium term,” Fitch Solutions said.

As a result of higher borrowings to beef up its COVID-19 war chest, it said the Philippines’ debt to GDP ratio may peak at 57.7 percent in 2022 before gradually falling over the coming years after rising sharply to 54.1 percent last year from 39.6 percent in 2019.  

“We believe the rise in public indebtedness in the near term is warranted given the weak economic backdrop and poses limited risks to the Philippines’ well managed public debt profile,” it said.

Prior to the global health crisis, the government had taken a prudent fiscal stance, reducing the public debt ratio to 39.6 percent in 2019 from 52.4 percent in 2010.

“We expect policymakers to return to lowering the public debt ratio over an extended period. The gradual reduction will be due to three long-term challenges we expect the Philippine economy to face:  meeting domestic energy needs, creating employment opportunities for the growing population, and addressing the country’s infrastructure deficit,” Fitch Solutions said.