Fiscal consolidation under threat as prices continue to rise

MANILA, Philippines — Rising global commodity prices continue to pose a risk to fiscal consolidation in several Asia-Pacific countries, including the Philippines this year, according to Fitch Ratings.

In a report, the debt watcher said the sharp rise in commodity prices over the past month poses a growing risk to fiscal consolidation in 2022.

“Some governments have increased implicit or explicit subsidies to cushion the impact on households,” he said.

In the Philippines, inflation rose to a six-month high of 4% in March from 3% in February, bringing the average to 3.6% in the first quarter.

On March 24, the Bangko Sentral ng Pilipinas (BSP) raised its inflation forecast to 4.3 instead of 3.7% this year and to 3.6 instead of 3.3% in 2023.

The central bank sees inflation remaining elevated and exceeding the government’s 2-4% target in the second half of the year due to higher global oil and non-oil prices before falling back into the range in the first quarter of the year. ‘next year.

Similarly, the Bureau of the Treasury (BTr) reported that the country’s budget deficit narrowed slightly by 1.97 percent to 187.7 billion pesos in March, from 191.4 billion pesos in March. last year.

For the first quarter, the country’s budget deficit decreased by 1.44% to 316.8 billion pesos against 321.5 billion pesos in the same quarter last year.

“Fitch Ratings expects the general government deficits of many sovereign states in APAC to narrow in 2022 from 2021. However, the deficits of all sovereign states except Pakistan will remain at above pre-pandemic levels, with much much higher,” the debt watcher said in the report. .

From January to March, revenue collection rose 12.6 percent to 784.4 billion pesos, from 696.5 billion pesos in the same period last year.

On the other hand, spending increased by 8.2% to reach 1,100 billion pesos in the first quarter, compared to 1,020 billion pesos in the same period last year.

“Government revenue has broadly recovered to 2019 levels, but spending is expected to remain above pre-pandemic levels in most sovereign countries in 2022. Pandemic-related spending will continue to decline after 2022, but some spending may decline. turn out to be rigid, making the cuts gradual,” says Fitch.

The credit rating agency says the subdued economic recovery across much of Asia is a key reason for the high and persistent deficits, as the emergence of pandemic-related headwinds has been slower than in other regions.

The Philippines emerged from recession with gross domestic product (GDP) growth of 5.7% last year, reversing the 9.6% contraction in 2020 as the economy stagnated due to strict quarantine protocols and COVID lockdown.

For 2022, Philippine economic officials envision a faster GDP expansion of 7-9%.

Fitch said government debt ratios had risen sharply during the pandemic in Asia-Pacific and around the world.

“Most APAC debt ratios are still below or in line with peer medians, but a higher debt burden leaves less fiscal space from a ratings perspective to respond to future shocks. inflation may favor a reduction in debt ratios in the short term, but this may not be sustained in the medium term,” he warned.

Fitch said the rebuilding of fiscal buffers in Asia-Pacific will be limited, reflected by relatively stable debt ratio trajectories, on average.

He said a projected return to high growth over the next few years would support the stabilization of debt ratios in many developed and emerging market sovereigns, but is unlikely to be sufficient for a sharp reduction in debt. , which would require faster-than-expected deficit reduction.

Fitch said debt trajectory uncertainty is also a factor in the Philippines, in combination with potential medium-term growth challenges.

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