Moody’s: Emerging markets face spending constraints

MANILA, Philippines — Emerging market economies, including the Philippines, are facing constraints in government spending amid long-lasting revenue losses due to the coronavirus disease 2019 or COVID-19 pandemic, according to Moody’s Investors Service.

The debt watcher said the ability of governments in emerging markets to implement and enforce effective revenue-raising measures would be an important credit driver over the next few years.

Lucie Villa, senior credit officer at Moody’s, said the global health crisis has underlined the importance of revenue generation for emerging market governments.

“For emerging markets, any fall in revenue is particularly important for creditworthiness because their government spending needs – social, infrastructure and debt financing – are often more urgent than for advanced economies and they have a generally narrower revenue base,” Villa said.

On average, governments in emerging markets are expected to lose revenues equivalent to 2.1 percentage points of gross domestic product (GDP) this year or more than double the one percentage point loss in advanced economies.

The debt watcher said almost all emerging markets are expected to record budget deficits this year and face constraints in cutting spending amid the pandemic, amplifying the importance of revenue generation.

Furthermore, it said fiscal revenues in emerging markets would stay below pre-crisis levels amid a slow and halting global recovery.

For one, the budget shortfall of the Philippines amounted to P740.7 billion from January to August this year or more than six times the P120.4-billion deficit recorded in the same period last year. The amount already surpassed the P660.24 billion booked for the whole of 2019.

Latest data from the Bureau of the Treasury showed revenue collections fell eight percent to P1.93 trillion from P2.09 trillion, while government spending jumped 21 percent to P2.67 trillion from P2.21 trillion.

The Department of Finance (DOF) sees the budget shortfall of the Philippines ballooning to 9.6 percent of gross domestic product (GDP) this year before easing to 8.5 percent of GDP in 2021 and to 7.2 percent in 2022 from 3.6 percent of GDP last year.

As a result, Moody’s said subdued global recovery would shift focus to broadening tax bases.

“Emerging market sovereigns will suffer long-lasting revenue losses due to the coronavirus crisis, with governments’ ability to implement and enforce effective revenue-raising measures set to be a key credit driver over the coming years,” it added.

With the support of development finance institutions, it said governments would look to implement or resume tax-raising measures.

However, Moody’s noted only a few governments have successfully raised revenue much faster than GDP growth over the last 10 years.