Fitch-owned BMI Research said concerns regarding the future of the government’s fiscal accounts are rising amid uncertainty over the identity of the next President, particularly if Davao City Mayor Rodrigo Duterte emerges victorious in the May 9 elections.
In a research note, BMI said, “May’s elections could pose risks to the country’s strong fiscal trajectory, particularly as [Mayor] Rodrigo Duterte [of Davao City]continues to poll strongly.”
The think tank unit of the Fitch Group said that while Senator Grace Poe and Mar Roxas would likely carry on the majority of economic policies put into place by the Aquino Administration, Duterte is somewhat of an outlier with a limited economic track record.
“Given that Duterte is currently running second in most surveys, we note that political risks with regards to the Philippines’ long-term fiscal outlook are not to be taken lightly,” it said.
BMI also expressed concern over a possible increase in spending on security and defense by a Duterte government, which it said, could weigh on the fiscal position and add fuel to tensions between the Philippines and China.
Budget gap to narrow
As a result of the risk posed by May’s election results to the country’s strong fiscal trajectory, the government’s budget gap as a percentage of gross domestic product (GDP) is likely to narrow this year, BMI said.
The Philippine budget balance in 2016 could decelerate to 0.2 percent of GDP from 0.9 percent in 2015, the research note explained.
On a positive note, BMI said the Philippine economy will be well-served by the Aquino Administration’s successful fiscal consolidation program, and the government’s roughly balanced budget has provided room for increased spending on both infrastructure and defense.
“The Philippine government has achieved noteworthy progress in consolidating its fiscal accounts since President Benigno Aquino 3rd entered office in 2010 with an agenda to balance the budget,” it said.
For instance, the think tank cited that in combination with the previous Administration’s efforts to trim the government’s debt position, total external debt guaranteed by the public has fallen precipitously over the past 10 years, from 34.3 percent in 2005 to just 14.4 percent in 2015.
“The Aquino government has not simply cut back on spending relative to revenue, it has also streamlined the budget-making process and improved the quality of spending,” it said.
BMI also mentioned that the Aquino Administration has passed the budget on time in each year of the current President’s tenure, “marking a dramatic departure from the days of last-minute supplementary budgets during previous Administrations.”
“The considerable fiscal space made available by the balancing of the government’s accounts has allowed the government to begin to aggressively ramp up spending in areas critical to improving the economy’s long-term growth potential,” it said.
2016 budget allocations
The think tank also lauded the government’s allocations in the 2016 national budget.
BMI mentioned that the budget includes a P766.5 billion ($16.3 billion) allocation for public infrastructure works, representing 25.4 percent of the overall planned expenditure of P3 trillion.
“This is a massive 35 percent surge from the allocation in the 2015 budget, and reflects the hard push that the Aquino administration is making toward revitalizing the Philippines’ woefully underdeveloped infrastructure in its final year in office,” it said.
Of this allocation, the think tank noted that P268.4 billion or 35 percent will go toward the construction and improvement of national highways and access roads, while P10.2 billion is earmarked for airports and seaports, and P15.7 billion for railways.
“The strong allocation from the government coincides with a brightening outlook for its private public partnership (PPP) program, which our infrastructure team believes is yielding significant results following years of difficulties,” it said.
As of the latest update, 12 PPP projects have been awarded, 14 others are in the procurement stage, two projects are ready for roll-out, seven are waiting for government approval with two more projects in ongoing studies, it said.
“The PPP program should bolster the government’s infrastructure development goals without significant fiscal outlays,” it added.
Lastly, BMI said government’s defense spending program will also receive a significant shot-in-the-arm this year, with total spending on defense surging to about P179.0 billion ($3.8 billion) representing an expansion of 48 percent from the previous year’s allocation.
Of the defense budget, P25 billion ($550 million) will be targeted toward the procurement of equipment that will modernize the country’s military, including aircraft, Navy frigates, and radar systems.
“The boost in the modernization allocation is part of the government’s broader efforts to shift its spending away from internal security and towards external defense as territorial conflicts with China in the South China Sea (or West Philippines Sea) continue to threaten the country’s sovereignty,” BMI concluded.