Fiscal, international payments during peso depreciation

(Continued from last week)

How the depreciation of the peso affects the fiscal position depends profoundly on: (1) the policy stance of the government and how capable it is to carry it out; (2) the economy’s starting macroeconomic position; and (3) the global environment for trade and growth.

Policy stance: Economic growth and recovery. The first year of the Marcos government’s fiscal budget is 4.9 percent higher than his predecessor’s (Duterte’s) budget.

Approved promptly by Congress at the level that the administration requested, the budget represents an expenditure of P5.3 trillion. It is the first year of a six-year budgeting program to carry out an eight-point socio-economic agenda to achieve for the nation from 2023 to 2028.

The objective is to achieve a 6.5 to eight percent annual economic growth rate of the GDP and to substantially reduce poverty from its current two-digit level to single digit level (nine percent) at the end of the six-year period.

The first year’s major priorities are focused on important sectors: education, infrastructure, health, agriculture, and social safety nets.

The education sector – which is composed of the Department of Education, the higher tertiary sector (under CHED) and the technical and skills development sector (under TESDA) – gets an allocation of P853 billion (representing an increase of 8.2 percent over the previous budget year). The major share of the budget is allocated to the DepEd at P710 billion.

The other big item in the fiscal program is spending on public infrastructure. A total of P1.196 trillion is allocated for the government departments implementing these programs – the public works and the transportation departments.

The development program reserves five to six percent of total GDP to be devoted to public infrastructure investment.

The protection of social safety nets, especially for the vulnerable poor marks the other important priorities of the budget. These include targeted programs of subsidies to help the poor and to encourage families to send their children to school.

All these indicate that the fiscal stance of the government is to support a strong economic growth and recovery program. The country is engaged in a program to promote social and economic growth that has meaningful economic outcomes for the country.

The peso depreciation affects the value of government spending. To the extent that government purchases of goods and services from its suppliers contain some import content, government spending is affected by the depreciation of the national currency.

In general, the government undertakes public spending so that most of it is devoted to the purchase of goods and services provided by local residents and suppliers. To that extent, it is generally directed toward incurring mainly domestic purchases.

But it is also inevitable that government needs involve some spending on foreign goods (machinery, equipment and foreign inputs like energy products and imported products) that are needed for continuing maintenance and new investments.

As a tool of economic policy, the budget directs how the government wants public resources spent, even as market developments may sometimes affect its value. As a tool of national economic policy, the effectiveness of the fiscal budget partly depends on the current nature of the economy.

Macroeconomic position of the national economy. The state of the national economy matters a lot. The current situation is much better off in this context.

Although faced with many dangers, the economy operates under sound macroeconomic fundamentals. The recent economic reforms undertaken at the end of the previous government made possible a less threatening economic climate for the succeeding Marcos administration.

The budgetary resources are in a strong position to recover because tax and revenue sources have been strengthened. Along with such achievements, the reform of fiscal incentives affecting investments was undertaken and economic liberalization to bring in more foreign direct investments were legislated. These reforms were undertaken in the midst of the pandemic that brought economic pain to the nation.

A serious budget crisis arose. This is an experience shared with many countries affected by the pandemic. The economic lockdowns during the period heavily disrupted the economy, with large emergency government assistance being handed to the stricken population while the economy suffered in decline.

From the very manageable levels of fiscal deficits during the early part of the previous administration under three percent of GDP, the deficits almost tripled in size during the last two years of the previous government during the pandemic experience. The government, however, delivered on the essential economic reforms to help move the economy forward and get out of the pandemic.

Economic growth has returned. The most recent-year-on-year economic growth record was 7.8 percent, which augurs well as a basis for attaining current economic targets.

With the budget well-positioned to continue its support of government programs, including continued and substantial public infrastructure investments, there is basis for an optimistic view of the future.

A strong possibility arising out of the peso depreciation is that exports are favored and the presence of a reformed foreign investment climate might bring in more foreign investments into the country as greater clarity of rules and investment climate information become known.

Improved remittances into the economy are likely to come in, and the BPO industries could experience continued expansion. In short, the balance of payments could improve, even as the country’s international reserves remain at a comfortable level.

Headwinds of uncertainty. Even as I write with optimism, it is important to note that the depreciation of the peso is partly caused by many headwinds that make the global economy still in unpredictable position.

These uncertain conditions in the current context cannot be ignored: Unkraine war and the potential for nuclear escalation; the global threat arising from the trade wars; the pandemic experience and and escalating geopolitical rivalries among regional and big powers. Each of these can have tsunamic adverse impact on any optimistic assessment.

For archives of previous Crossroads essays, go to: https://www.philstar.com/authors/1336383/gerardo-p-sicat. Visit this site for more information, feedback and commentary: http://econ.upd.edu.ph/gpsicat/