LOWER revenue expectations are forcing the Philippines to scale back infrastructure spending, creating a fiscal tradeoff that could weaken growth, complicate efforts to stabilize debt and the sovereign’s ‘BBB’ rating, Fitch Ratings said.
In a commentary, the credit rating agency said reduced revenue projections, which have fallen to around 15.5 percent of gross domestic product (GDP) over the medium term from around 16.5 percent in last year’s framework, are causing ‘significant adjustments’ in the government’s fiscal plans.
As a result, the government is planning to reduce infrastructure disbursements to roughly 4 percent of GDP, about 1 percentage point lower over the projection period.
‘Weaker public infrastructure spending could weigh on medium-term growth, although the extent to which lower disbursements will affect growth remains unclear,’ Fitch said.
Governance reforms could improve spending efficiency and guard the economic impact of lower infrastructure spending levels, while increased use of public-public partnerships and local government units for infrastructure investment could reduce overall government disbursements, it added.
In April this year, Fitch revised its outlook on the Philippines’ issuer default rating to ‘negative’ from ‘stable’ while affirming the country’s ‘BBB’ sovereign rating due to ‘growing risks’ around the country’s medium-term growth potential.
‘Investment remains well below its pre-pandemic trend; and without a sustained recovery, downside risks to medium-term GDP growth are likely to persist,’ the agency said.
Second-quarter GDP remained slow at 2.3 percent, dragged by investments and capital formation, which both contracted by 9.2 percent and 8 percent, respectively.
‘Slower growth is feeding into the fiscal outlook,’ Fitch said, noting the government’s deficit target of 5.1 percent of GDP in 2027, which was slower than the 4.8 percent deficit forecast in last year’s medium-term fiscal framework.
‘Repeated upward revisions to medium-term deficit targets suggest the government continues to prioritize supporting growth over a faster pace of consolidation, leaving risks tilted towards a more gradual reduction in deficits over the next few years,’ it added.
Fitch said the government has also turned ‘more cautious’ in its growth assumptions and expects medium-term growth to average around 6 percent, although risks are tilted towards weaker outcomes.
The ratings agency also sees general government (GG) debt to GDP to increase slightly in the near term before stabilizing over the medium term.
‘Achieving that outcome will depend considerably on growth performance, investment recovery and the effectiveness of efforts to sustain infrastructure investment,’ it said.