Progress in Philippine's recovery slowed by deficit

Manila (Agence France-Presse): The Philippines' economic recovery may be delayed because the government has trouble dealing with the ballooning budget deficit, Deutsche Bank said in a report obtained here Saturday.

The bank's Asia-Pacific equity research office also warned that the government might not have the political will to control the deficit with the approach of national elections in 2004.

"The consequences of a higher deficit on sentiment, the peso and interest rates could push out the anticipated cyclical economic recovery by a few quarters and dampen the near-term outlook for stocks," Germany's largest bank said.

It cited the announcement in August that the budget deficit in the first seven months of the year had hit 133 billion pesos (US$2.5 billion), already exceeding the government's full-year 130 billion-peso ceiling.

It also cited the resignation of tax chief Rene Banez in August after entrenched interests in the Bureau of Internal Revenue allegedly blocked his reforms in revenue collections.

The higher-than-expected deficit up to July was "the start of a recurring shortfall in government revenues and a continuing build-up of debt," Deutsche Bank said.

The deficit was a "reflection of weak tax revenues rather than fiscal irresponsibility" on the part of President Gloria Arroyo's government, the bank said.

But weak revenues were a "cyclical and structural phenomenon," which would not be easily remedied, the bank said.

It also warned that with 2004 being an election year, both Congressmen and Arroyo would likely call for greater expenditures to get elected back into office.

The bank noted the increase in the projected deficit in 2003 to 142 billion pesos, up from the original projection of 90 billion pesos.

"A new fiscal timetable promises a balanced budget in 2006 — two years later than originally scheduled," the bank commented.

Deutsche Bank conceded that there was ample liquidity but warned that "the appetite for Philippine risk will be limited," unless Manila could show it would not continue raising budget deficit targets.

The bank acknowledged that the budget deficit would still be less than four percent of the country's gross domestic product (GDP), adding that filling this shortfall would not. be a problem if there was just more confidence and liquidity in capital markets.

It also said the country would continue to benefit from the massive remittances of the millions of Filipinos working overseas, remarking that such remittances make up seven percent of GDP and cushions the economy even during bad times.