Dec. 14 (Bloomberg) -- The Philippines is preparing a surge in state spending in coming months that will widen its budget deficit in 2012 as the government seeks to shield the economy from the European crisis, Budget Secretary Butch Abad said.
The 2011 shortfall will be 150 billion pesos ($3.4 billion) to 180 billion pesos, Abad, 57, said in an interview late yesterday in Manila. The estimate is more than double the 74.3 billion-peso deficit in the ten months through October, and compares with a previous forecast of 260.6 billion pesos. The gap may reach 286 billion pesos next year, or 2.6 percent of gross domestic product, he said, reiterating an earlier estimate.
“This time, our problem will be different; how to keep within the ceiling,” Abad said. “Demand from the outside is going to be weak and we will have to depend on consumption or demand from within. This is our participation, making sure we are cranking the government machinery to create that demand.”
President Benigno Aquino has won credit-rating upgrades from Fitch Ratings and Moody’s Investors Service this year after taking steps to narrow the budget gap from a record 314 billion pesos in 2010. As Europe’s deepening sovereign-debt crisis threatened to push the world into another recession, the Philippines unveiled a 72 billion-peso fiscal stimulus package in October to bolster growth.
“Given the external environment, the domestic economy could do with a little more fiscal support,” said Euben Paracuelles, a Singapore-based economist at Nomura Holdings Inc. “The higher government spending should be good. You can’t count on exports to be supporting growth.”
The peso fell to a ten-month low today, declining along with most Asian currencies after the U.S. Federal Reserve offered no new measures to spur economic growth and as European leaders’ plans to stem their debt crisis failed to assure investors. Philippine exports dropped for a sixth month, a report showed yesterday. The peso fell 0.6 percent to 44.155 a dollar as of 11:58 a.m. in Manila. Benchmark 11-year bonds due January 2022 dropped for a second day.
The economy expanded 3.2 percent in the third quarter, holding near the 3.1 percent pace the previous three months that was the slowest since 2009. Without the decline in construction caused by slow spending on public works, growth would have reached 3.8 percent, the government said. Meeting this year’s 4.5 percent-to-5.5 percent growth forecast is going to be a challenge, Abad said.
“If we are to continue to be shielded, government needs to spend more on employment-generating projects and the large-value infrastructure that are needed as base for sustainable long-term growth,” central bank Governor Amando Tetangco said on Dec. 11.
The Department of Budget and Management will authorize spending for 170 billion pesos worth of infrastructure projects at the start of the year as part of the 1.8 trillion-peso budget that Aquino will sign tomorrow, Abad said. By spending a bigger part of the budget in the first half before typhoons start, the Philippines has a better chance of meeting the forecast 5 percent to 6 percent GDP growth in 2012, Abad said.
“It’s going to be much better than our performance in the whole of 2011,” he said.
On top of public works, the government has started to offer projects for private investment. Ayala Corp. and a unit of San Miguel Corp. submitted bids for a 2 billion-peso road project, Public Works Director Rebecca Garsuta said this week.
Spending fell 5.4 percent in the first 10 months of 2011 as projects inherited from the administration of Gloria Arroyo were scrutinized in line with Aquino’s anti-corruption campaign, the budget secretary said.
“Some of the under-spending is due to the fact that we ran the finances of the government much better,” Abad said. The government will use the funds to give cash to the poor, relocate the homeless and provide electricity and health care, he said, estimating that about 45 billion pesos to 100 billion pesos of the budget unspent this year will be carried over to 2012.
A wider deficit in 2012 is something that credit rating companies and investors shouldn’t worry about, Abad said. The Philippines will stick to a plan of narrowing the deficit to 2 percent of GDP by 2013, the budget chief said.
Bond exchanges and a debt buyback completed this year will yield about 37 billion pesos in savings while an improved inventory of state workers that will eliminate ”ghost” police and soldiers is expected to cut costs by 20 billion pesos, he said.
Next year, the government wants Congress to pass laws that will adjust excise taxes on beer and tobacco based on inflation to generate 60 billion pesos in additional income, ”rationalize” tax incentives and provide a revenue measure for every spending item, Abad said.
“Initially, we were constrained by the president’s promise that we will not impose new tax measures,” Abad said. “There was a debate that these are not new tax measures and are administrative reform measures. The president said: ‘Okay let’s push that.’”
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