MANILA – The government’s fiscal consolidation is expected to be hampered partly by the impact of a possible slowdown of growth, elevated inflation rate and the Bangko Sentral ng Pilipinas’ (BSP) rate tightening cycle.
In a report released on Friday, Fitch Solutions Country Risk and Industry Research revised its budget deficit forecast for the country this year and sees this now to count for 6.4 percent of gross domestic product (GPD) from 6.1 percent previously.
“The Philippines remains on the path of fiscal consolidation but at a more gradual pace. We think that a sharper narrowing of the budget shortfall in 2023 is unlikely due to slowing growth and elevated expenditure level,” it said.
Fitch Solutions said possible slowdown of domestic output “will be a key source of fiscal pressures” this year.
It projects a 5.9 percent economic expansion, as measured by gross domestic product (GDP), this year, slower than the 7.6 percent print in 2022.
“High domestic inflation, weak external demand, and aggressive monetary tightening undertaken by the BSP will constrain economic growth and inevitably weigh on the public coffers,” it added.
The BSP’s key rates have been hiked by a total of 425 basis points from May 2022 to March this year in a bid to help address the country’s elevated and sticky inflation rate.
The report also said the impact of further lowering of tax rates of those from the lower-middle income bracket will have its effect on government revenues, growth of which is expected to expand by only around 4 percent this year from an 18 percent year-on-year growth in 2022.
The government’s bid to sustain higher infrastructure spending will also have an effect on fiscal consolidation, it said, as it projects the share of expenditure to domestic output to post a higher average of around 19.8 percent until 2027 from the pre-pandemic level of around 17.6 percent.
“To achieve his (President Ferdinand Marcos Jr.) goal of maintaining growth at 6.5 to 8 percent, the Marcos administration has signaled that it will maintain an accommodative fiscal stance throughout this presidential term which spans the period 2022-2028,” it said.
The report said “a better infrastructure framework will help play a vital role in Marcos’ ambitious plans to make (the) Philippines a prime destination for foreign investors.”
“Despite a wider-than-expected deficit, we note that the budget shortfall is still on a narrowing trend, which will bode well for the country’s fiscal sustainability,” it added. (PNA)