2019/27, 18 March 2019
The end-of-year statistics for the Philippines in 2018 indicate two worrying trends for the Philippine economy under the Duterte administration. The most worrying was the sharp increase in the trade deficit from a concerning 8.7% of GDP in end-2017 to the much larger 12.5% of GDP at end-2018. At end-2015, the trade deficit was a manageable 4.2% of GDP. Exports last year fell by 1.8%, despite a healthy 15.2% increase in the largest export item, electronic products. Imports surged by 13.4% with imports from China growing by 22.5%. Trade figures for January 2019 saw a further decline in exports and sharp uptake in imports.
Despite significantly higher revenues, the 2018 budget deficit was 59% larger than the year before and breached the government’s own debt ceiling target of 3.0% of GDP, coming in at 3.2% of GDP. In 2015, the budget deficit was less than 1% of GDP. 2019 should sink the deficit further into the red, if the 2019 budget is passed as it is currently the object of a standoff between the Senate and the House of Representatives. Infrastructure spending is expected to rise to 910 billion pesos while the newly introduced Universal Health Care Act is estimated to cost 257 billion pesos to implement in 2019.
The political backlash against the first major tax reform of the Duterte administration passed in late December 2017 suggests that the four other tax reform packages planned by this administration may not prosper. The first tax package that reformed income tax was introduced at the same time that the inflation rate shot up leading many to blame the tax reform for higher prices. Currently, the budget deficits and related increases in public debt are not a cause for worry or a significant source of pressure on the currency or interest rates. This will change if the deficit continues to grow as sharply as it has since end-2015.
The administration of President Benigno Aquino was rightly applauded for improving the fiscal situation of the Philippines while the trade deficit remained manageable. On the other hand, it was correctly criticized for underspending on infrastructure. Mid-way through the Duterte administration, the opposite appears to be true.
Dr Malcolm Cook is Senior Fellow at the ISEAS – Yusof Ishak Institute.
The facts and views expressed are solely that of the author/authors and do not necessarily reflect that of ISEAS – Yusof Ishak Institute. No part of this publication may be reproduced in any form without permission.