Fiscal catch-up faces narrowing deficit headroom

From AB Capital's The Opening Bell: Three Moves

Event

September's budget deficit was broadly unchanged at P248.9 billion, as 13% revenue growth nearly matched the 7% increase in spending. However, the 9M26 deficit widened 16.6% to P1.303 trillion, exceeding its programmed level by P97.4 billion and already absorbing 78.6% of the full-year deficit ceiling.

View

We think September's stronger collections are encouraging, but the fiscal mix remains less supportive of growth than headline spending suggests. Interest payments rose 16% to P772.1 billion in 9M26, absorbing roughly 30% of the incremental expenditure increase, while the growth contribution from higher infrastructure spending remains dependent on execution.

Catalyst

With only P356 billion of deficit headroom remaining against the P1.659 trillion annual ceiling, the government faces a tighter balance between fiscal catch-up and consolidation. Meeting the full-year program requires roughly P1.27 trillion in 4Q26 collections against P1.63 trillion in disbursements, leaving limited room for revenue underperformance or spending overruns.

Action

In our view, stronger infrastructure disbursements would support construction, cement and infra-linked credit demand, but actual project payments remain the key confirmation. Continued deficit slippage and rising interest costs could sustain pressure on government bond yields, limiting valuation recovery for rate-sensitive sectors, particularly property and REITs.

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