Budget deficit seen to exceed P256 billion

MANILA, Philippines - The Development Bank of Singapore (DBS) said it is possible that the country’s budget deficit will exceed the worst-case scenario of P256 billion as predicted by Socio-economic Planning Secretary Ralph Recto.

Because of dimming fiscal conditions, DBS said the Philippine peso will not fare well as long as the government’s budget deficit is causing worries over fiscal sustainability and the exchange rate is seen dropping to P51.5 by 2010.

DBS said its medium-term outlook for the Philippine peso is negative as the cumulative budget deficit surged to P119.7 billion in the first quarter, more than twice the level in 2008.

“Historically, the peso does not perform well when fiscal worries increase,” DBS said. “The peso is also not helped by slowing overseas worker remittances, which will no longer help the current account offset the persistent trade deficits.”

DBS said the country’s fiscal deficit is under widening pressure from both falling government revenues and rising expenditures.

“It is well possible that the budget deficit will not only surpass the official estimate of P199 billion for the full year, but also Economic Planning Secretary Ralph Recto’s current worst-case estimate of P257 billion,” DBS said.

“If revenue collection does not improve in the second quarter and the second half of 2009, the government would have to spend less than P91 billion on average per month to keep the deficit below P257 billion,” DBS said.

DBS pointed out that actual government expenditure levels going that low are unlikely in the current environment because P91 billion would be much less than the average monthly expenditure in 2008, which was P106 billion.

“Therefore, much depends on revenue collection which is unlikely to be boosted amid slowing economic growth,” DBS said.

Moreover, DBS said the market is not likely to be enthusiastic about the need for the government to return to the international debt market to raise funds, not when its latest balance of payments registered a deficit from debt repayments.

“Hence, we will keep a moderate depreciation profile for the peso, and see $/peso rising to 50 by the end of the second quarter in 2009 and to 51.5 by the end of the first quarter in 2010,” DBS said.