Angelo Taningco
Economist, Treasury Group

Philippine fiscal deficit in the first half of the year (H1) amounted to P193 billion, which is 25% higher on a year-on-year (yoy) basis but is 27% lower than the government’s program. Government revenue and spending have both exceeded their respective targets, albeit, the former outperforming the latter. We estimate H1 fiscal deficit to be at 2.3% of projected GDP. In the second half (H2), however, we expect government disbursements to accelerate as this is usually backloaded, especially in the fourth quarter (Q4) when spending for personnel services, capital and maintenance expenditures are at its heaviest. We maintain our full-year 2018 fiscal deficit forecast of 2.7% of GDP, which is below the government’s 3% program. Meanwhile, with fiscal deficit to potentially widen in H2, we expect this to boost H2 economic growth as well as to result in further increase (and steepening) in government securities (GS) yields (yield curve).

June’s fiscal deficit totaled P54.3 billion (b), down 40% yoy but up 65% month-on-month (mom). Government’s revenue growth of 25% yoy for the month vastly outclassed its spending increase of 3%. On a quarterly basis, fiscal deficit narrowed 73% quarter-on-quarter (qoq) and 43% yoy to P40.8b in the second quarter (Q2), falling short of the government’s Q2 target of P45.3b. In H1, fiscal deficit reached P193b, 25% bigger from H1 2017 but 27% less than the government’s H1 target. Though both revenues and expenditures by government have exceeded their respective targets, the former has outperformed the latter, resulting in a lower-than-programmed fiscal deficit.

We estimate the H1 fiscal deficit to be at 2.3% of projected GDP. We think this is manageable as it is well below the government’s 3% target. We assess the fiscal program to be healthy given the strong revenue performance and with expenditures also above target. In fact, both Fitch and Moody’s have recently affirmed their sovereign ratings on the Philippines at BBB and Baa2, respectively, partly due to expected revenue improvement this year amid the enactment into law of TRAIN that imposes higher excise taxes on automobiles, petroleum and tobacco products as well as new taxes on cosmetics and sweetened beverages. Such bigger revenues will likely help ensure fiscal stability and support the government’s Build, Build, Build program, which aims to boost infrastructure spending and elevate the country’s economic growth.

Meanwhile, we think the country’s fiscal risk could potentially increase especially if government’s plan to shift to federalism would entail huge costs and lead to an erosion in fiscal discipline as well as if the Supreme Court ruling to increase revenue share of local government units (LGUs) would impose heavy fiscal burden. Nevertheless, with a potentially wider but manageable fiscal deficit in H2, we expect GS yields to climb further and for the yield curve to continue its steepening trend. Moreover, we think H2 economic growth will be supported by more aggressive fiscal spending.

Figure: Fiscal Indicators (P billion)

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