Philippine government reduces debt as budget deficit shrinks

Perhaps Greece could take note of how the new Philippine government is ramping up tax collections.

Christian de Guzman, Assistant Vice President - Analyst, Sovereign Risk Group, Moody's Investors said that last Monday, the Philippines’s Department of Finance released the government’s 2011 full-year fiscal results, which confirmed a lower-than-budgeted deficit despite a spike in spending during the last two months of the year. Consequently, the debt reduction that began in 2005 is intact and is credit positive. Last year’s favorable results reflect improvements in both revenue and expenditure performance that we expect will continue in 2012.

“We expect tax revenues to continue improving owing to administrative measures to further enhance compliance, and a legislative agenda that aims to increase certain excise taxes and reduce extraneous fiscal incentives for investment. New budgeting rules and procurement processes should guard against underspending and ensure that government spending supports economic growth. Although we expect the fiscal deficit to widen slightly to 2.4% of GDP from 2.0% in 2011, the deficit will still be in line with the government’s medium-term fiscal program to 2016. Moreover, the Philippines’s debt-to-GDP ratio will likely continue to decline in 2012 and beyond. “

Total revenue grew by 12.6% in 2011, outpacing the 8.1% increase in nominal GDP and largely reflecting the increasing traction of administrative measures. Tax revenue rose nearly 10% despite the absence of new taxes, while a highly visible tax enforcement program spurred greater compliance, especially for personal and corporate income taxes collected by the country’s Bureau of Internal Revenue. Non-tax revenues also grew strongly, driven largely by increased remittances of profits by government owned and controlled corporations.

Restrained expenditures and active debt management led to a subdued 2.3% increase in spending last year. The first half of 2011 was characterized by underspending, with total expenditures 11.4% lower than they were in 2010; consequently, government financial consumption was a drag on economic growth during the first half, shaving off 0.72 of a percentage point from year-over-year real GDP growth. In response to slowing domestic and external demand, the government refined its procurement processes to facilitate spending to support growth, and increased total outlays, excluding subsidies, and interest payments by 17.9% year over year in the second half, and by a particularly strong 36.0% during the last two months of the year.

Active debt management has also played a key role in fiscal and debt consolidation through cost savings. The Bureau of the Treasury has strategically engaged in debt buybacks and exchanges over the past 18 months. With an improved credit profile and stable inflation, new government debt issuance now also commands lower interest rates. As a result, interest payments in 2011 fell 5.2% despite a higher nominal amount of debt. Interest payments as a share of total revenues fell to 20.5% from as high as 36.8% in 2005, indicating an increasing degree of fiscal flexibility.