Despite the risks inherent in a higher fiscal deficit, a more aggressive spending program by the incoming administration could boost both near-term economic growth as well as the country’s long-term potential, Fitch-owned BMI Research said.
“President-elect Rodrigo Duterte’s economic blueprint is slowly materializing following his dominant victory in May’s Presidential election…,” it said in a report.
The ‘blueprint’ includes a plan to raise the government’s fiscal deficit to 3 percent of gross domestic product (GDP) from 0.9 percent in 2015, BMI noted.
“While these developments are not sufficient to warrant an upgrade to our real GDP forecasts for the coming years (as significantly more details will be needed to provide a more accurate assessment), under the right conditions, a more aggressive spending program by the Philippine government could boost both near-term economic growth as well as the country’s long-term economic potential,” it added.
However, the think tank stressed that there are critical caveats to this assertion.
The first major point it mentioned is that spending should be directed toward the most productive purposes, including infrastructure, research and development, education, healthcare, and agriculture.
“Duterte himself has placed a particularly large emphasis on more aggressive infrastructure spending, as well as investment in the country’s large but relatively inefficient agricultural sector,” it stated, noting that specifically, the President-elect has targeted public infrastructure spending to reach the equivalent of 7 percent of GDP.
BMI said this would be a huge jump from the current level of spending of P436 billion in 2015, which is equivalent to just 3.2 percent of GDP.
The report nevertheless cautioned, “A surge in realized expenditures on infrastructure projects to 5 percent to 7 percent of GDP will not happen overnight…”
The think tank added, “there will be plenty of fiscal space with which the government can spend without under-mining its overall indebtedness position,” assuming that the government sticks to an annual deficit cap of 3 per-cent, and nominal GDP growth achieves BMI’s forecasted rate of 9.8 percent per annum through 2022.
“The low global interest rate environment, which we expect to persist for some time, will also keep financing costs lower than in the past,” it added.
Also, BMI said that while high fiscal deficits have the potential to be inflationary, this should not be the case as long as the disbursements are efficiently directed into the aforementioned productive areas.
“Indeed, substantial progress in terms of infrastructure and agricultural development in particular could eventually prove to lower the Philippines’ structural inflation rate by addressing supply-side bottlenecks,’ it concluded.