Philippines' fiscal position remains strong with budget deficit at P22.8b

Further upgrades by rating agencies are certainly possible over the medium term, says DBS.

DBS Group Research said:

The government’s fiscal position remains strong with the latest data indicating that the budget deficit amounted to PHP22.8bn in the first five months of this year.

While this figure was higher compared to the PHP9.5bn deficit registered in the same period last year, it must be noted that the 2011 figure was skewed to the downside due to disbursement bottlenecks.

Increased government expenditure is actually a positive sign, indicating that there will be support for the domestic economy amid significant external headwinds in the coming months. Moreover, the government still ran a primary surplus amounting to PHP108bn as of May.

Meanwhile, the country’s external accounts remain resilient. Although weak external demand will drag on the trade balance, inflows from remittances are still expected to remain stable and this should provide support to the current account. We still expect a full-year current account surplus of USD6.2bn, a slight narrowing from USD7.1bn in the preceding year.

Peso outperformance relative to its peers in the region is an indication of the country’s external accounts strength. Coupled with active management to extend the maturity of government debt, it is not surprising to see the country’s 5-yr CDS narrow against its peers over the past two years. Further upgrades by rating agencies are certainly possible over the medium term.