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Philippines: Remaining fiscal space deemed ‘sufficient’ to fund larger pandemic spending
MANILA, Philippines — The Duterte administration can still afford to unleash a bigger pandemic stimulus, thanks to still “sufficient” fiscal space that the government should use to prevent a massive economic scarring.
Although last year’s pandemic spending ballooned government debt, as a share of the economy, to 54.6% from a record-low 39.6% in 2019, it is yet to reach the alarming level of 70% of gross domestic product, giving the state “a relatively large fiscal buffer” to finance a larger stimulus package, ASEAN +3 Macroeconomic Research Office (AMRO), a regional surveillance organization, said in a report released Tuesday.
The government has all the room to borrow more, AMRO said. Foreign obligations only account for less than half of the entire debt pile so it’s not vulnerable to external shocks like higher interest rates and a stronger dollar, while investment grade credit ratings would allow the state to borrow offshore at much cheaper costs.
“The debt stock buffer was still large enough for the government to undertake discretionary fiscal policy measures to support the economy without significantly risking debt sustainability,” AMRO said.
“Given the large negative output gap and the moderate fiscal policy space available, more expansionary fiscal policy measures are deemed appropriate should the economic recovery falter or weaken,” it added.
It’s a suggestion that came amid economic managers’ reluctance to spend more on coronavirus programs over fears of tarnishing the country’s hard-won credit ratings. So far, economic officials are open to adding P170 billion on existing spending to finance a much-needed relief package, but there is one condition: any additional costs should have a counterpart revenue source because the government cannot add more to its debt load.
Already, the government sees the budget deficit swelling to a record 9.4% of GDP this year, a level that economic officials already considered as “concerning”. But despite expectations of a wider fiscal gap, the Duterte administration still downgraded its growth outlook for this year and next to 6-7% and 7-9%, respectively, which means the economy would still underperform even with more fiscal stimulus in place.
For AMRO, this only increases the urgency for the government to take advantage of its remaining fiscal policy space. Indeed, a larger stimulus package could balloon debts in the short-term, but AMRO believes multiplier effects from additional spending could help the economy regain lost output and, in turn, generate more resources to pay for debts.
Results of AMRO’s debt stress test showed that an expansionary stimulus package would increase the debt-to-GDP ratio by 0.9% in 2022, but the ratio should go down by 2.0% in 2025 as economic recovery outweighs the growth in debts. To deliver the best outcome, the government should use the borrowed funds to the right programs, AMRO said.
In its report, AMRO forecast the economy to grow 6.4% year-on-year in 2021 — which would reverse last year’s record-breaking 9.6% contraction — before expanding at a faster rate of 6.8% in 2022. The projections were more optimistic compared to the outlook of multilateral banks, but AMRO stressed achieving a 6% growth would be “challenging” for the Philippines amid threats from renewed lockdowns and a sluggish immunization program. Even the typical boost from election-related spending is expected to be muted next year.
“While it is important to preserve some policy space in a highly uncertain environment, sufficient fiscal support is essential to expedite the recovery, revitalize economic activities and confidence, and support livelihoods,” it said.
Source: https://www.philstar.com/business/2021/06/29/2108939/remaining-fiscal-space-deemed-sufficient-fund-larger-pandemic-spending