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Citibank foresees new budget blowout

03/20/2009

The budget deficit may hit around three percent of gross domestic product (GDP) or P238 billion by the end of the year instead of the government’s announced target of P178 billion, or 2.3 percent of GDP as overall growth suffers, a Citibank report on the country warned.

“Whether the government would be in a position to cut spending and prioritize fiscal deficit containment rather than growth would be the difficult policy choice to make,” according to Citibank.

Citibank’s fiscal gap projection, if correct, would be the biggest ever for the country. The last time the budget deficit broke out was in 2002 when it hit P211 billion mainly as a result of anemic revenue collections and government overspending.

Remittances from Filipinos working abroad will also likely miss the Bangko Sentral ng Pilipinas (BSP) forecast of $16.4 billion by the end of the year, Citibank added.

Remittances would range lower from $11.4 billion up to only $13 billion as deployment numbers suffer from the impact of the global economic downturn, Citibank analyst Jun Trinidad said in a paper.

“We assume the global stock of overseas Filipinos estimated by government at 8.7 million would diminish as new hires and re-hires drop by 37 percent to 51 percent amid lower global demand for labor,” Trinidad added.

He said deployment would likely fall to around 800,000 a year, from the more than 1 million overseas Filipino workers (OFWs) deployed annually since 2001.

“The overseas headcount loss, with average month contribution remaining constant, would yield lower remittances of $13 billion a year,” he said.

“If we further assume a wage cut of 14 percent to 15 percent to further preserve existing jobs, our estimate falls to $11.4 billion,” Trinidad said.

A drastic drop in foreign transfers, in turn, would result in consumption activities being reduced by two percent or lower than Citibank’s original forecast of three percent.

This means growth this year will suffer as consumption activities is a primary economic driver that made possible last year’s 4.6 percent expansion.

BSP Gov. Amando Tetangco Jr. had said consumer spending “will continue to propel the economy (this year) even at this difficult time.”

Nevertheless, Citibank said the markets should worry more of the possible fiscal sector deterioration this year than the similarly likely weakening of the external sector.