Public finance no longer a shortcoming

PUBLIC FINANCE is no longer a shortcoming for the Philippines, Fitch Ratings yesterday said.

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“Public finances were traditionally a weakness of the Philippine sovereign credit profile. When Fitch reviewed the credit in June 2012, however, we recognized that improvements in the debt profile…,” the debt watcher said in a report.

“Thus, the agency believes the public finances, on balance, have a neutral impact on the sovereign credit profile.”

The government’s management of its liabilities was credited as the cornerstone of the new assessment. The deficit is projected to have fallen to 2% of gross domestic product (GDP) last year, while national debt was pegged at 40.3% of GDP — both in line with the median ratios of similarly-rated countries. Interest payments have also decreased, debt maturities lengthened, and borrowings shifted towards domestic sources.

The debt watcher pointed out, moreover, that “important strides” had been made to improve the quality of public spending.

It lauded the zero-based budgeting method implemented by the Aquino administration, wherein budget items must be justified every year regardless of their previous expenditure level. Under traditional budgeting, only incremental increases must be explained, and the shift has improved transparency and reduced the potential for corruption.

“These improvements suggest fiscal space for discretionary spending items such as infrastructure investment, education and healthcare services, has grown,” Fitch said.

“Increased budgetary allocations to these sectors may allow the economy to recover some of the potential lost due to prior fiscal consolidation.”

However, reforms could stall the spending momentum.

“Entrenching bureaucratic reform and restoring public faith in the government is a key objective of the current administration. Thus, Fitch expects poor budgetary execution to persist while the bureaucracy adjusts.”

Public spending dropped drastically in 2011 as agencies struggled to roll out their projects given tighter budget and procurement requirements. The underspending limited GDP growth that year to a dismal 3.7%.

The spending pace has since improved, carrying the economy to a stellar 6.5% showing as of the third quarter of 2012.

The gains offset the country’s weakness of a narrow base for government revenues, which comprised just 18.3% of GDP, below the median of 27.2%.  — Diane Claire J. Jiao, Senior Reporter, Businessworld