‘War impact to slow fiscal consolidation’

MANILA, Philippines — In a report, Oxford Economics said Asia-Pacific economies are expected to stay on the path of fiscal consolidation, although at a slower pace across the region.

Oxford economists Makoto Tsuchiya and Priyanka Kishore said this is because economies would struggle to balance containing upside inflation risks and keeping an eye on downside growth risks.

“It is especially important for the twin-deficit economies of India, Thailand and the Philippines to not lose sight of their medium-term fiscal targets given the risk of credit rating downgrades,” they said.

The so-called “twin deficit” continues to threaten the pace of recovery in the Philippines.

A twin or double deficit happens when a country has both a current account deficit and budget deficit, which means that imports are higher than exports and the government is spending more money than the revenues it is generating.

Last year, the Philippines’ deficit, when measured against the country’s gross domestic product, rose to 8.61 percent from 7.65 percent in 2020.

Tsuchiya and Kishore said having a clear fiscal consolidation path for a twin deficit economy such as the Philippines is important to avoid financial market volatility and possible credit downgrades.

They added that risks of a credit rating downgrade have increased for Thailand, the Philippines and even Malaysia over the past years, although such may not be imminent as growth prospects have improved as economies learned to live with the virus.

“However, rating agencies have repeatedly noted their concerns about the lack of a clear fiscal consolidation roadmap for the twin deficit economies and could choose to move against our expectations if their medium-term growth projections turn less optimistic,” they said.

The Department of Finance earlier said the incoming government would have to jump on a fiscal consolidation plan where tax rates could be increased and expenditures cut.

The country is facing ballooning debt and the new administration is expected to have a challenging fiscal position.

The Oxford economists noted that government interventions such as subsidies amid commodity price shocks would likely be impacted again this year.

“The downside revisions are larger for the net commodity importers – Singapore, India and the Philippines,” they said.

While Asia-Pacific has limited economic and financial ties with Ukraine and Russia, the region is a significant importer of war-impacted commodities whose prices are unlikely to fall back to pre-war levels anytime soon.

In the Philippines, war-impacted commodities, led by oil, have close to 20 percent share in the import basket. Others are cereals, gas, iron and steel, coal and fertilizers.

Tsuchiya and Kishore said food inflation, in particular, is a politically sensitive issue as food expenditure accounts for a large share of spending for the poorer segments of society and raises their cost of living.

This means that governments would be quick to intervene via subsidies to mitigate the impact of higher prices, thus, higher spending again.

The Philippine government is  implementing fuel and food subsidies to cushion the blow of the war on commodity prices.

Further, the economists emphasized that the slowdown in fiscal consolidation implies debt levels will keep rising across Asia this year. The good thing is that the region still has fiscal space to sustain elevated debt levels, at least for now.

“This is not to say that Asia doesn’t need to pursue fiscal consolidation. While fiscal measures are necessary to dampen inflation and keep the economic recovery on track this year, it is important to keep sight of the growth and sovereign risks associated with prolonged periods of elevated debt levels,” they said.