Fitch unit expects wider budget gap for 2022

MANILA, Philippines — Fitch Solutions Country Risk & Industry Research raised its 2022 budget deficit projection for the Philippines but said the country is on track for gradual fiscal consolidation over the coming years due to strong revenue growth.

It said the Philippines may incur a wider budget shortfall of 7.6 percent of gross domestic product (GDP) instead of 7.5 percent for 2022.

For 2023, the research arm of the Fitch Group is expecting a lower budget gap of six percent of GDP instead of 6.1 percent.

“Our 2022 budget deficit forecast is in line with official projections while our 2023 budget deficit forecast is slightly below official projections of 6.1 percent due to a difference in growth assumptions,” it said.

According to Fitch Solutions, the slight revisions came after the release of the budget notes by the Senate Economic Planning Office on Sept. 12, detailing the macroeconomic and fiscal assumptions of the proposed 2023 national budget.

The research arm still believes the Philippines is on track for gradual fiscal consolidation over the coming years due to strong revenue growth on the back of extensive tax reforms and robust economic growth which will offset expansionary fiscal spending.

“Despite an increase in fiscal spending, we still believe that the Philippines remains on track for gradual fiscal consolidation over the coming years due to strong revenue growth,” Fitch Solutions said.

It expects the public debt-to-GDP ratio to peak at 61.1 percent next year, boding well for fiscal sustainability.

“As such, we expect the public debt-to-GDP ratio to peak at 61.1 percent in 2023, before declining from 2024 onwards,” it said.

Data from the Department of Finance (DOF) showed that the government’s budget deficit as a share of GDP swelled to 8.6 percent in 2021 from 7.6 percent in 2020.

Prior to the COVID-19 pandemic, the government managed to narrow the gap to 3.4 percent of GDP in 2019.

On Aug. 22, President Marcos proposed a record 2023 budget of P5.27 trillion to Congress in order to achieve his economic agenda of maintaining real GDP growth at 6.5 to eight percent throughout his term from 2022 to 2028.

The proposed spending is 4.9 percent higher than the 2022 budget, and is projected to reach 22.1 percent of GDP.

“As of Oct. 5, details of the budget have yet to be finalized, but we expect a few changes to be made in the approved 2023 budget. Thus far, the proposed budget has already passed Senate deliberations on Sept. 29, and is now being presented in the plenary, at the time of writing,” Fitch Solutions said.

It said expenditure would likely remain elevated over the coming years as President Marcos looks to continue former president Duterte’s flagship Build, Build, Build project.

“We expect disbursement growth to be in line with the government’s projections of 2.6 percent in 2023 as the Marcos administration has signaled that it will still maintain a supportive fiscal stance to help spur economic growth,” it said.

In 2023, Fitch Solutions expect revenue growth to come in strongly at 10 percent year-on-year, on the back of extensive tax reforms and a robust economic backdrop.

“The array of tax reforms under the comprehensive tax reform program has helped boost revenue growth considerably since its inception, and we will likely see the continued impact of it moving forward,” it said.

The Marcos administration has committed to trim the deficit back to three percent of GDP by 2028.

“The widening of the fiscal deficit was primarily due to a collapse in revenue coupled with expansionary spending as the government sought to mitigate the economic fallout from the pandemic,” Fitch Solutions said.

As a result, the government’s debt as a share of GDP ballooned to 60.4 percent in 2021 compared to 39.6 percent before the COVID-19 pandemic.