Gov’t underspending biggest drag on Phl economy next year – Citi

MANILA, Philippines - Government underspending would be the biggest drag to economic growth next year, Citi said in a research note.

“We believe that fiscal underspending would probably constitute the largest macro risk over the next six to 12 months since domestic demand continues to be the key growth driver,” Jun Trinidad, economist at Citi, said in the latest Emerging Markets Macro and Strategy Outlook.

Another risk to be mindful of is the looming power crisis expected in the second quarter of next year, he added.

The bank has forecast  the Philippine economy to grow 6.3 percent this year and 6.5 percent in 2015. Both are below the government’s 6.5- to 7.5-percent goal for 2014 and the seven- to eight-percent target for next year.

“Net exports can provide one-off surprises just like in 3Q14 (third quarter of 2014) when two-digit export gains and benign imports implied a heft net export gain that mitigated fiscal spending during the quarter,” Trinidad noted.

The domestic economy expanded by 5.3 percent in the third quarter, the slowest since the fourth quarter of 2011.

Socioeconomic Planning Secretary Arsenio Balisacan last week said economic growth may accelerate in the last quarter, adding a six-percent expansion for the full year would still be “very respectable” despite being below the target.

“Coupled with ‘dim light’ scenario in 2Q15 (second quarter of 2015), the key question is whether legacy fiscal spending and other income catalysts like remittances, private investments in BPO (business process outsourcing) and power with favorable construction effects, would be sufficient to ensure that the economy continues to chug along at over six percent,” Trinidad said.

He continued: “Conscious of Aquino’s legacy, we sense a strong fiscal bias would not be derailed in undertaking various projects/programs to recover potential GDP (gross domestic product) lost to Yolanda’s fury.”

Trinidad said there may be a subdued risk of fiscal spending from the fourth quarter of this year following the approval and the start of the implementation of the P171-billion budget for rehabilitation and reconstruction efforts for Yolanda-stricken areas.

The approved package consists of a P35.1-billion infrastructure budget, a P26.4-billion social services program, a P75.7-billion resettlement budget, and a P33.7-billion allocation for livelihood projects, Trinidad recounted.

“The reconstruction/rehabilitation of typhoon-devastated regions kicks off Aquino’s legacy fiscal spending,” Trinidad said.

“Other programs/projects under DAP (Disbursement Allocation Program) stalled by the High Court’s decision, untangling of legal issues governing recently awarded PPP (public-private partnership) projects to unleash its investment potential, and other FY15 (fiscal year 2015) budget priorities implies a heft spending gain in 2015,” he added.