“The impact of war on slowing fiscal consolidation”

MANILA, Philippines — In a report, Oxford Economics said Asia-Pacific economies are expected to stay on a path of fiscal consolidation, albeit at a slower pace across the region.

Oxford economists Makoto Tsuchiya and Priyanka Kishore said this was because economies would struggle to find a balance between containing upside inflation risks and monitoring downside growth risks. decrease.

“It is particularly important for the twin-deficit economies of India, Thailand and the Philippines not to lose sight of their medium-term fiscal targets given the risk of credit rating downgrades,” they said. declared.

The so-called “double deficit” continues to threaten the pace of recovery in the Philippines.

A twin or double deficit occurs when a country has both a current account deficit and a budget deficit, which means that imports are greater than exports and the government is spending more money than the revenue it receives. generates.

Last year, the Philippines’ deficit, measured against the country’s gross domestic product, rose to 8.61%, from 7.65% in 2020.

Tsuchiya and Kishore said it was important to have a clear fiscal consolidation path for a twin-deficit economy like the Philippines to avoid financial market volatility and possible credit downgrades.

They added that the risks of a credit rating downgrade have increased for Thailand, the Philippines and even Malaysia in recent years, although this may not be imminent as growth prospects have weakened. improved as economies learned to live with the virus.

“However, rating agencies have repeatedly raised concerns about the lack of a clear roadmap for fiscal consolidation in the deficit twin economies and may choose to go against our expectations if their medium-term growth projections become less optimistic,” they said.

The finance ministry said earlier that the new government should jump on a fiscal consolidation plan where tax rates could be raised and spending reduced.

The country faces skyrocketing debt and the new administration is expected to have a difficult fiscal situation.

Oxford economists noted that government interventions such as subsidies amid commodity price shocks would likely be affected again this year.

“Downgrades are larger for net commodity importers – Singapore, India and the Philippines,” they said.

While Asia-Pacific has limited economic and financial ties with Ukraine and Russia, the region is a major importer of war-affected commodities whose prices are unlikely to fall back to pre-war levels. anytime soon.

In the Philippines, war-affected commodities, led by oil, make up nearly 20% of the import basket. Others are grain, gas, iron and steel, coal and fertilizers.

Tsuchiya and Kishore said food inflation, in particular, is a politically sensitive issue, as spending on food accounts for a large share of spending by poorer segments of society and raises their cost of living.

This means that governments would be quick to intervene via subsidies to mitigate the impact of rising prices, therefore, an increase in spending again.

The Philippine government introduced fuel and food subsidies to cushion the blow of the war on commodity prices.

In addition, economists have pointed out that the slowdown in fiscal consolidation implies that debt levels will continue to rise across Asia this year. The good thing is that the region still has fiscal space to support high debt levels, at least for now.

“That’s not to say that Asia doesn’t need to pursue fiscal consolidation. While fiscal measures are needed to dampen inflation and keep the economic recovery on track this year, it is important to keep in mind the growth and sovereign risks associated with prolonged periods of high debt levels. “, they said.

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