Budget, current-account deficits seen risking credit downgrade

The economic managers have drawn a macroeconomic program anticipating a deficit in both the fiscal or budget balance, as well as on the country’s current account, an aggregate that for 15 years told the story that the Philippines is a net lender to the rest of the world.

But with the budget deficit seen to equal 3 percent of local output or the GDP this year in addition to another anticipated shortfall in the current account, the $305-billion Philippine economy could take a turn for the worse and complicate things for President Duterte and the Cabinet economic cluster.

The economic managers anticipate a budget deficit as wide as P482.1 billion this year but seen even wider to P523.6 billion next year. The numbers equal 3 percent of GDP. The country’s current account, on the other hand, was seen widening from 0.2 percent of GDP this year, or some $600 million, to 0.5 percent of GDP, or $1.6 billion.

An expanding current-account imbalance typically weakens the local currency and such weakening comes at a time when Finance Secretary Carlos G. Dominguez III and colleagues at the Cabinet economic cluster are funding an ambitious multibillion dollar public infrastructures buildup program.

This year alone, the budget planners crafted a spending program where the exchange rate ranges from P48 to P50 per dollar and wider next year from P48 to P51 per dollar. A potentially weaker peso puts additional pressure on capital imports the country needs to underwrite its “Build, Build, Build” program.

At the moment, the spending program projects a trade imbalance widening to $$39.7 billion this year and even wider next year to $44.9 billion as necessary imports outpace exports. Worse, the trade deficit widens some more down the line to $49.8 billion in 2019 and $56.5 billion in 2020.

Analysts at the Dutch financial services giant ING Group in Manila said forecast inflows from overseas Filipino remittances and from outsourcing of some $57 billion “would barely cover the trade deficit”.

A further complication from such a deficit other than potentially more expensive capital goods imports include capital flight that also discourages capital inflows, said Joey Cuyegkeng, senior economist at ING Manila.

The imbalance does not yet factor prospectively higher fiscal deficit borne out of the Build, Build, Build program, seen widening to P575.6 billion in 2019 and to P633.7 billion by 2020. All these numbers in the aggregate could tell on the country’s credit stature rated investment grade at the moment by Moody’s Investor Service, Standard and Poor’s, as well as by Fitch Ratings.

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Turning Points 2018