Aquino Needs to Reduce Philippine Deficit With `Bold' Targets, Pimco Says
Philippine President-elect Benigno Aquino, who may unveil his choice for finance chief as early as today, needs to cut the budget deficit and increase investment to boost growth, Pacific Investment Management Co. said.
“If the new finance secretary can articulate a credible fiscal consolidation program to help move the Philippines to investment-grade category in the next three to five years’ time, that would be a tremendous market booster,” Chia-Liang Lian, a Singapore-based fund manager at Pimco, which runs the world’s largest bond fund, said in a June 25 interview.
Philippine growth has lagged behind its Southeast Asian neighbors as a budget shortfall in all but four of the past 25 years curtailed the government’s ability to develop an economy where the World Bank estimates one in every four people live on less than $1.25 a day. Aquino, who will replace Gloria Arroyo this week, has refrained from saying whether he will reduce the deficit, forecast by policy makers to hold near a record level.
Global bonds issued by the Philippines have returned 17 percent in the past year, less than Indonesia’s 30 percent advance, according to an HSBC Index that tracks the region’s dollar bonds. The country’s debt is rated below investment level by Fitch Ratings, Standard & Poor’s and Moody’s Investors Service, and is graded lower than that of neighboring Malaysia, Indonesia and Thailand.
In the 20 years through 2009, the Philippine economy expanded an average 3.7 percent annually, lagging behind Thailand’s 4.7 percent and Malaysia’s 6 percent.
Regional Underperformer
“The Philippines will not be attaining investment grade anytime soon,” Edwin Gutierrez, who helps manage about $5 billion in emerging-market debt at Aberdeen Management Plc in London, said in an e-mail today. “The lack of public investment which poor tax collections condemns the Philippines to also implies that it will continue to be a regional underperformer with respect to growth.”
The president-elect, whose mother Corazon Aquino helped oust former dictator Ferdinand Marcos in 1986, has vowed to go after tax evaders and corrupt officials rather than raise taxes.
Philippine policy makers expect the budget shortfall to be little changed at 297.2 billion pesos this year from a record 298.5 billion pesos in 2009. That’s more than the 293.2 billion- peso gap forecast earlier. The five-month deficit widened to 162.1 billion pesos, exceeding the first-half target.
Bold, Realistic
“I want a promise that the new administration will cut the deficit,” said Yvette Marquez, who helps manage about 480 billion pesos ($10 billion) at BPI Asset Management in Manila. “They have to generate revenue either by generating more economic activity, raising taxes, or encouraging foreign direct investments.”
The Philippine peso climbed for the first time in five days, rising 0.2 percent to 46.35 per dollar at 2:31 p.m. in Manila on optimism Aquino will announce policies to boost economic growth. Benchmark four-year bond yields fell one basis point.
“Macro targets need to be bold yet realistic at the same time, to the end that policy makers are not seen as over- promising but under-delivering,” said Lian. Pimco, which has more than $1 trillion of assets, owns and is “supportive” of Philippine dollar-denominated debt, he said.
This year’s budget gap is estimated at 3.6 percent of gross domestic product, from 3.9 percent last year, according to government forecasts. Fitch Ratings predicts the deficit will be 4 percent of GDP, excluding asset sales.
Pressing Concern
“In the near term, the deficit is a more pressing concern,” Andrew Colquhoun, Hong Kong-based head of Asia- Pacific sovereigns at Fitch, said in an e-mailed reply to questions from Bloomberg News last week. “A lower deficit would support the sovereign credit-worthiness of the Philippines and we are looking out for more details on the fiscal policy strategy of the new administration.”
Aquino on June 17 said he will “need to verify” the fiscal data “to determine the appropriate action to take” on the budget shortfall and other economic targets. He has said he plans to unveil the appointments to his cabinet and economic team this week.
Cesar Purisima, who was Arroyo’s finance secretary in 2005, is part of Aquino’s group of advisers. Philippine newspapers including Philippine Daily Inquirer have reported that Aquino will return Purisima to the post he left in July 2005.
Spending Raised
Gary Teves, the current finance secretary, said last week the new administration should consider a proposal to raise taxes, including the value-added tax, to increase revenue by 94 billion pesos next year.
The government raised its 2010 spending budget for public works, salaries and debt payments to a record 1.62 trillion pesos from a previous forecast of 1.58 trillion pesos, Budget Undersecretary Laura Pascua said in an interview last week. Revenue, including gains from the sale and lease of assets, may climb to 1.32 trillion pesos compared with an earlier estimate of 1.28 trillion pesos, she said.
Fitch rates the Philippines BB, two levels below investment grade. The company in January raised Indonesia’s rating to one step below investment grade. S&P rates Philippine debt BB- and Moody’s has a Ba3 grade, both three levels below investment.
Philippine GDP growth may accelerate to a range of 5 percent to 6 percent this year from 1.1 percent in 2009, officials predicted earlier this month. The country’s $167 billion economy expanded 7.3 percent last quarter, the fastest pace in almost three years, increasing demand for Ayala Land Inc. homes and Banco de Oro Unibank Inc. loans.
“One focal point for the Philippines is to boost its investment spending, a necessary ingredient to bolstering its long-term GDP growth potential,” Pimco’s Lian said. “Policy makers should accelerate efforts to promote the country as a destination for foreign direct investments.”
By Bloomberg
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