Philippine Deficit May Widen on Plan to Lift Spending (Update1)

06/15/2010 - June 15 (Bloomberg) -- The Philippine government’s budget deficit this year may widen amid plans to boost spending and attain faster economic growth, officials said today.

The country’s economic managers will meet later today to discuss increasing the growth target from the current 2.6 percent-to-3.6 percent range. If the gross domestic product forecast is raised, “nominally, the deficit could be higher” as the government takes advantage of rising tax revenue to boost spending, Finance Assistant Secretary Ma. Teresa Habitan said.

President-elect Benigno Aquino’s pledge to ensure spending benefits the poor, such as through more rural roads, has so far failed to roil the nation’s bond market. Yields have fallen as faster growth helps cap the budget gap, with the government projecting the deficit will narrow to 293.2 billion pesos ($6.3 billion) this year from a record 298.5 billion pesos.

“A higher deficit would mean more borrowing, more supply of debt,” said Dave Estacio, chief fixed-income dealer at First Metro Investment Corp. in Manila. “Faster growth also implies higher interest rates. The trend is for bond yields to rise.”

The yield on four-year benchmark local-currency bonds was little changed at 5.735 percent, near the lowest since the bonds were first sold in January 2009.

Spending ‘Flexibility’

The government may keep the deficit target at 3.6 percent of GDP, Budget Secretary Joaquin Lagonera said in a telephone interview today.

As the economy expands, an increase in the value of the deficit wouldn’t necessarily lead to a higher ratio. Every percentage point added to growth may bring in 13 billion pesos annually in tax revenue, giving the government the “flexibility” on spending, Habitan said in a telephone interview today.

Economic growth quickened to 7.3 percent last quarter, the fastest pace in almost three years. While Aquino, 50, who replaces Gloria Arroyo later this month, has described the expansion as a “flash in the pan,” forecasts for faster economic growth may help him stick to his campaign pledge to refrain from raising taxes.

The government may raise the low end of its economic growth target for this year to 3.6 percent, acting Economic Planning Secretary Augusto Santos said last week (Business Week)

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