Fitch unit expects small Philippine budget gap

MANILA, Philippines — Fitch Solutions Country Risk & Industry Research is now expecting the Philippines to book a smaller budget deficit over the next two years on the back of strong revenue growth from a recovering economy and positive tax reforms, offsetting expansionary fiscal spending.

In its latest report,” the Fitch Ratings unit said it now expects the country’s budget shortfall to hit 7.5 percent instead of 8.1 percent of gross domestic product (GDP) this year, and 6.2 percent instead of 6.7 percent next year.

“The Philippines is still on track for a gradual fiscal consolidation over the coming years as strong revenue growth from a recovering economy and positive tax reforms will offset expansionary fiscal spending,” Fitch Solutions said.

The research arm of the Fitch Group made the revision after the Department of Budget and Management (DBM) released the national budget memorandum, detailing the fiscal aggregates approved by the Development Budget Coordination Committee (DBCC) last May 24.

“Our 2022 deficit forecast is slightly below the official projection of 7.6 percent of GDP due to a slower economic growth assumption, whilst our 2023 forecast is slightly wider than the government’s projection of 6.1 percent of GDP as we expect expenditure to exceed official target,” it added.

According to Fitch Solutions, it still believes that the Philippines is still on track for a gradual fiscal consolidation over the coming years as strong revenue growth, alongside a recovering economy and positive tax reforms, would likely offset expansionary fiscal spending.

The Philippines is now prioritizing fiscal consolidation starting from 2022, with a goal to narrow the fiscal deficit to 4.1 percent in 2025 in line with the commitment of president-elect Ferdinand Marcos Jr. through incoming finance secretary Benjamin Diokno to narrow the budget deficit-to-GDP ratio to three percent by 2028.

“However, we acknowledge there is still a high degree of uncertainty with regards to the 2023 fiscal projections as Marcos may not stick to the current fiscal projections by the outgoing Duterte administration as he looks to fund his government’s initiative,” it said.

Incoming budget secretary Amenah Pangandaman said that the new economic team would convene in the first week of July after the inauguration of president-elect Marcos and then resubmit budget
proposals thereafter considering the priorities and programs of the new administration.

The Philippines booked a record P1.67 trillion budget deficit or 8.6 percent of GDP last year due to soaring public expenditures to fight the prolonged COVID-19 pandemic amid weak revenue collections.

For the first quarter, the country’s budget shortfall narrowed by 1.4 percent to P316.8 billion or 6.4 percent of GDP from P321.5 billion in the same quarter last year.

The Cabinet-level DBCC is expecting the deficit to narrow to P1.65 billion or 7.7 percent of GDP this year amid the sustained economic recovery as the country continues to reopen from strict COVID-19 quarantine and lockdown protocols.