Fitch unit sees budget gap further widening this year

But cites fiscal consolidation plan on track

MANILA, Philippines —  The research arm of the Fitch Group has raised its 2023 budget deficit forecast for the Philippines to 6.4 percent of gross domestic product (GDP), from an earlier estimate of 6.1 percent, on the back of slower economic growth. In a commentary,Fitch Solutions Country Risk & Industry Research said the Philippines remains on the path of fiscal consolidation over the medium term, but at a more gradual pace.

It said the recent tax revamp under Republic Act 11534 or the Corporate and Tax Incentives for Enterprises Act (CREATE) would have some repercussions on revenue growth.

Fitch Solutions said revenue growth may drop considerably to four percent this year from 18 percent last year.

On the other hand, expenditures may grow by 19.8 percent between 2023 and 2027 compared to the pre-pandemic five-year average of 17.6 percent due to the continued emphasis of the Marcos administration on infrastructure projects.

“These have led us to be less optimistic in regard to Philippines’ fiscal position and we now expect the shortfall to come in at 6.4 percent of GDP in 2023, which is wider than official projections of 6.1 percent (similar to our previous forecast),” it said.

“Despite a wider than expected deficit, we note that the budget shortfall is still on a narrowing trend which will bode well for the country’s fiscal sustainability,” Fitch Solutions added.

It said a better infrastructure framework would help play a vital role in the ambitious plans of the Marcos administration to make the Philippines a prime destination for foreign investors.

Under the Philippines’ fiscal consolidation plan, the government aims to narrow the budget shortfall to three percent of GDP by 2028 after widening to 8.6 percent of GDP In 2021.

For this year, the government aims to cut the shortfall to 6.1 percent of GDP after successfully reducing it to 7.3 percent of GDP in 2022.

“However, we think that it will likely fall short of the President’s target as the Philippines has to strike a challenging balance between enhancing growth and fiscal consolidation,” it said.

Fitch Solutions sees the budget deficit narrowing only to 3.8 percent of GDP by the end of the term of President Marcos in 2028.

It also projects economic growth slowing significantly to 5.9 percent this year after accelerating to 7.6 percent last year from 5.7 percent in 2021.

This year’s projection is slightly below the six to seven percent GDP growth target penned by the Cabinet-level Development Budget Coordination Committee (DBCC).

Fitch Solutions, on the other hand, said the country’s debt-to-GDP ratio may decline slightly to 59.8 percent this year from 60.9 percent last year, still way above the pre-pandemic level of 39.6 percent.

This, it explained, is similar to countries elsewhere in the world, as authorities scrambled to increase disbursements substantially to contain the pandemic-induced economic fallout at the same time as revenue collapsed.

“Debt levels will likely remain on a downward trend thereafter. Persistent inflation in the Philippines could see the government provide more subsidies to ease the cost of living. That would in turn result in the fiscal deficit being larger than we currently expect,” it said.

Fitch Solutions warned that a more pronounced economic slowdown could see the government increase expenditure spending to support the economy.