MANILA, Philippines – Global financial giant ING Bank upped its two-year growth forecast for the country, driven by the Duterte administration's plans to increase deficit spending.
The Netherlands-based multinational raised its GDP forecast to 6.5% from the original 6.2% for this year, and 6.2% – up from little over 6% – for 2017.
"We have upgraded our 2016 and 2017 growth forecasts on the back of higher deficit spending but still relatively affordable financing costs for the private sector while consumer spending remains buoyant with structural inflow growing at an average growth of 9% this year and next year," said Joey Cuyegkeng, senior economist at ING Bank Manila, on Tuesday, June 14.
Cuyegkeng added that growth likely accelerated in Q2, boosted by election spending that ran up until May. Growth is also seen to average 6% in the last two quarters as the election boost runs its course.
The country posted the highest GDP growth in Asia for Q1, growing at 6.9%.
"We anticipate that higher consumers' incomes and purchasing power and higher government spending would keep growth at above 6% in 2017. Improvement in agriculture output in 2017 would present some upside possibilities," Cuyegkeng said.
The upgraded forecast comes as the Duterte administration has committed to raise deficit spending, or spending using borrowed money, to 3% from the current 2% of GDP set by the Aquino administration.
Incoming budget secretary Benjamin Diokno earlier said that the plan is to increase the budget deficit in order to increase spending on infrastructure projects.
"We estimated that the increase in deficit spending to 3% of GDP would entail around P150 billion more in government financing needs for 2017, with domestic liquidity remaining high [and] the cash position of government remaining strong in the near term," Cuyegkeng said.
The higher spending, he added, would likely lead to stronger economic activity as the new government initially reforms the income tax system while eventually accelerating infrastructure spending to 5% of GDP from the current level of around 4%.
ING said the increased deficit spending would not lead to fiscal deterioration as the debt-to-GDP ratio will remain on a downtrend. The descent, however, would not be as fast at a more modest level of deficit spending.
Along with the increase in spending, ING also anticipates inflation to rise above 2% towards the end of the year before picking up to 3% next year.
"High monetary liquidity and strong cash position of government would moderate uptick in yields resulting from higher deficit spending," Cuyegkeng said.
ING pointed out that the government may have more financing options open to it as it considers the possibility of tapping Sukuk or Islamic bonds. These are bonds that are structured to generate returns without infringing on Islamic law.
ING also said that the country is likely to retain its investment grade ratings from S&P Global Ratings, Moody's Investors Service, and Fitch Ratings. – Rappler.com