The Philippine economy might fall short of meeting its full-year growth target, the Department of Finance (DOF) said, as slower revenue collection and dampened government spending continue to weigh on the country’s expansion prospects.
Finance Secretary Ralph Recto also revealed that the Philippines was poised to receive a credit rating upgrade from ‘BBB+’ to ‘A-‘ from S and P Global Ratings this year, if not for the corruption scandal that erupted over the flood control projects of the Department of Public Works and Highways (DPWH).
Recto noted that several factors could influence the country’s economic performance, as a rebound in private sector confidence and sustained household spending amid easing interest rates could help offset the slowdown.
‘We could miss it, 5.5 percent? We hit 5.4 percent,’ Recto told reporters after the Senate deliberations on the DOF’s budget.
The Cabinet-level Development Budget Coordination Committee lowered this year’s economic growth target to 5.5 to 6.5 percent from the earlier projection of six to eight percent.
‘We reduced the interest rates last week. It will be wind in our sail moving forward. And more rate cuts will be good for the economy. But it all depends on where inflation will be,’ Recto added.
The Philippine economy expanded in the second quarter to 5.5 percent, slightly faster than the 5.4 percent recorded in the first quarter of this year.
However, Recto admitted that an economic slowdown would likely rein in due to subdued spending, which could have an impact on overall economic activity.
‘There may be a possible slowdown in growth this third quarter because of the reforms being initiated by the President to ensure that taxpayers’ money is spent properly in executing the budget,’ Recto said during the budget deliberation.
He added that the economic outlook remains positive moving forward, as the economy is expected to realize its full growth potential once current issues are resolved.
‘As the government slows down its spending, the economy may also be slightly affected,’ the Finance chief added.
Data from the Department of Budget and Management showed that government spending on infrastructure and other capital outlays decreased to P93.3 billion in July, from P124.9 billion the previous year.
The DBM attributed the decrease to the muted disbursements, citing delays in procurement activities and contractors’ incomplete submissions and billings.
Recto added that the favorable demographic data and a stable macroeconomic environment could easily sustain growth, provided that the government executes the budget properly and ensures the proper use of taxpayers’ funds.
‘The good news is that moving forward, everything will be on the upside because we are fixing the problems. This, however, remains the biggest internal threat,’ he said.
The finance chief earlier stated that economic growth could have reached six percent, as economic losses from alleged corruption in infrastructure projects are estimated to be between P42.3 billion and P118.5 billion.
During the budget hearing, Senate finance committee chair Sherwin Gatchalian said he does not want people to lose confidence in the government and boycott paying taxes because of the corruption of public funds in flood control and other infrastructure projects.
‘That’s why it’s important to fight corruption and curb corruption. I commend the DOF for stating that the department will never tolerate corruption,’ he stressed.
Domino effect
When asked if there’s a significant chance of a credit rating reduction, Recto said there remains a strong possibility that the country’s credit rating will be maintained, although he noted that the likelihood of an upgrade had been much higher before the controversy.
‘You know, if not for this flood control issue, when we met with S and P, they were ready to give us a credit rating upgrade. When we met with them last week, they were ready, we were already set to move one notch higher. So it’s really unfortunate,’ he said.
A high credit rating indicates that the country is considered creditworthy, meaning it is very likely to repay its debts on time. An improvement in the rating signals a strong economy, rooted in sound fiscal management, which can lead to lower borrowing costs.
S and P Global Ratings has previously revised its growth outlook for the Philippines downward to 5.6 percent from the previous 5.9 percent, citing weaker private consumption, slower investment activity and ongoing global economic uncertainties.
With the proposal to reduce the value-added tax to 10 percent from the current 12 percent, Recto warned that a decrease in revenues could surely impact the Philippines’ global rating.
He added that he would likely share the same view if he were in the credit agency’s position.
‘It is governance. We have to improve on that and I’m convinced that we will be able to do it. It will take us a few months to finish all of that,’ he said.