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Monday, November 23, 2009

Philippines: Fiscal outlook revisited


- Deterioration in Philippines fiscal situation attracting attention

The success of Filipino champion boxer Manny Pacquiao in the ring has
led some commentators to draw a stark contrast with the state of
National Government (NG) finances. In particular a FT Lex column on 20
November highlighted that:

1) The Philippines fiscal position has suffered recently.
2) This has put strain on Philippine government local currency funding
efforts. On 17 November, the government failed to sell local currency
bonds for the third time this quarter.
3) Overseas investors can't be relied on to substitute for local
investor demand.
4) Despite this Philippine sovereign bond yields have been behaving
themselves for now, but all eyes will be on the success of sovereign
issuance early next year.

- Potential trend deterioration in revenue growth is a concern

In the Southeast Asian focus published on 2 October we put the
deterioration of the Philippine National Government finances in context.
There is no question that the Philippines fiscal situation has
deteriorated - with the weakness of the revenue line is a particular
cause for concern (Chart 1). However, we take a relatively benign view
on the grounds that some of the deterioration in revenue is cyclical.
Moreover, the resulting deficit is now more easily sustained as the
Philippines enjoys a combination of reasonable real and nominal GDP
growth prospects, plus (in contrast to the period before 2003) an
underutilised pool of domestic savings.

- Near term funding fears are overdone

This does not mean there will not be a bit of push and pull over the
price of domestic government debt - the Philippines domestic financial
markets are not deep. But we think the reliance on overseas investors is
overstated by the Lex article.

Importantly, the Philippines enjoys a current account surplus, and thus
excess savings, supported by surprisingly strong remittances. Properly
intermediated, these savings flows should easily fund the government's
deficit domestically. But in the likely event of poor intermediation,
the associated flows of foreign currency have, and should continue to,
provide 'local demand' for foreign currency debt issued by the
government. The remittance flow driven local and foreign currency
savings pool reduces reliance on foreign funding and helps explain why
Philippine domestic and sovereign yields have been behaving themselves
(Charts 4 and 5).

- Revenue risks

Now, there is danger that government revenues - the perennial bugbear of
Philippine finances - do not recover with a pickup in the economic
activity. If so, the incoming administration after the May 2010
elections will have to quickly make some tough decisions. But for now,
assuming a cyclical recovery in revenues, we are relatively sanguine
from a Philippine deficit funding perspective

Please see Southeast Asia Focus: Sustainable growth and fiscal policy;
Ed Teather; 2 October 2009 for a more detailed look at Philippines
National Government fiscal sustainability.

Chart 1: NG fiscal balance has deteriorated as expenditure rose and
revenues fell.
Source: UBS, Haver, CEIC

Chart 2: Philippine fiscal balance has deteriorated - but is not clearly
out of line with developments elsewhere in EM
Source: UBS, Haver, CEIC

Chart 3: The deterioration in Philippines revenues is probably partly
cyclical (as with the weakness elsewhere).
Source: UBS, Haver, CEIC

Chart 4: In any case, unlike in the early 2000s and 1990s, the
Philippines now has savings available in excess of those required to
fund investment.
Source: UBS, Haver, CEIC

Chart 5: Excess savings put downward pressure on interest rates and
makes financing the deficit a lot easier by reducing reliance on foreign
Source: UBS, Haver, CEIC

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