fiscal deficit

A Philippine Sovereign Wealth Fund

The Philippines is suffering from a rare form of “Dutch disease”, the negative consequences of a rapid rise in income normally associated with the export of natural reserves. In our case, the income comes from our export of labour. Overseas remittances rising every year swell our foreign currency reserves. The peso appreciates as a result. This diminishes the global competitiveness of our manufacturing sector with adverse implications for domestic employment.

Meanwhile government keeps borrowing from international markets to finance its chronic budget deficits. This contributes to the upward pressure on the domestic currency as more dollars flow in to purchase government securities. To keep its borrowing down and make credit rating agencies happy, government constrains its spending. It wants to rely on public-private partnerships (PPP) to provide infrastructure which are both time-consuming to arrange and limited in scope.

As it postpones development spending credit rating upgrades keep coming. Each time this happens, fund managers around the world increase the flow of “hot money” into the stock market, thus contributing to more upward pressure on the peso. Property developers also cash in as the value of residential and commercial assets appreciates with the rising peso, which creates even more demand for new development.

The families that receive remittances on the other hand suffer as the purchasing power of the dollar declines. And due to their dependence on these transfers, the income that families receive goes mostly to household expenditures. Very little is invested in productive activity. And when it is, the investment normally goes into retail or transport enterprises, which earn very marginal returns.

For the rest of the population, finding a job is a struggle. Life is hard as there are not enough opportunities that come by due to a dearth of fixed private capital expenditures on plant and equipment let alone research and development. Most of the inflows go to short-term investments, i.e. the stock market, or to fund property purchases, which results in very little job generation outside the construction industry which demands casual employment due to the seasonality of its activity.

This in a nutshell is the problem that confounds the Philippines.

Foreign remittances for the twelve months to January 2012 hit $20 billion according to the World Bank. Remittances for the first ten months of 2012 have already equaled that amount according to central bank figures (with the Asian Bankers Association estimating the real amount to be in the order of $27 billion). This was close to 90 per cent of the Bureau of Internal Revenue”s total tax collections for 2011, and would have been enough to finance that year’s budget deficit four times over. As of November 2012, the country’s gross international reserves (GIR) stood at $84 billion exceeding the BSP’s full year estimate of $78 billion.

This was enough to cover our imports for a full year or to settle all short-term debt obligations 12 times based on original maturity and 6.8 times based on residual maturity (that is short-term loans based on original maturity plus principal payments on medium- and long-term loans of both private and public sectors falling due in the next 12 months).

In fact back in June 2012 when the GIR stood at $76.1 billion, the country’s external debts belonging to both the public and private sectors stood at $62.5 billion. That means the BSP had enough to settle all external obligations and still have roughly $14 billion left over.

The two charts below show what has happened over the past decade. The first one shows that after a rocky first half, the country has been producing consistent balance of payments (BoP) surpluses averaging about 3.8 per cent of GDP from 2005-2011. That is the inward flow of foreign currency exceeded the outward flow by the said ratio. A quick rule of thumb is that 1 per cent of GDP is roughly $2.5 billion or Php100 billion.

So on average, the annual surplus has been about Php380 billion during the past six years. The average BoP surplus is therefore more than enough to accommodate government’s annual revenue shortfall averaging 1.11 per cent a year. The second chart shows the effect these surpluses have had on our GIR. From 2001 to 2011, it has grown on average by 16.7 per cent. Up until 2005, you can see that the line is pretty flat. Afterwards it rises steeply. This means that a tipping point in the flow of overseas remittances occurred back then which placed our BoP structurally in surplus territory from that point on.

Surpluses and deficits, in per cent of GDP

No wonder bond markets have had such confidence in the Philippines. As the saying in business goes, banks will only offer you credit when you don’t need it. The question is do we just keep accumulating these reserves knowing the problems they create for our economy? Or do we actually put the excess funds to good use by investing in the country’s development?

As the title of the piece suggests, we could set up a sovereign wealth fund (SWF) with our excess reserves. The $14 billion mentioned above, which by the end of the year will probably be $15 billion would be the seed money. That is enough to double our infrastructure spending which is currently 1.5 per cent of GDP to 3 per cent, much closer to the recommended 5 per cent, over the next four years. With that added spending, the government could easily meet its aspirational stretch target of growing the economy by 7-8 per cent a year.

Every year, depending on how well our balance of payments performs, we could just keep adding to the SWF. Assuming that the government’s new revenue measures and fiscal consolidation will mean an annual deficit of about 1 per cent of GDP and that the annual BoP surplus remains at 3 per cent of GDP, there would be enough to fund government’s deficit and set aside another 1 per cent to augment the SWF, with the remaining 1 per cent going to GIR.

But we are getting ahead of ourselves. Let us first define what is a SWF? According to the Sovereign Wealth Fund Institute, it is

a state-owned investment fund or entity that is commonly established from balance of payments surpluses, official foreign currency operations, the proceeds of privatisations, governmental transfer payments, fiscal surpluses, and/or receipts from resource exports.

The Institute cites some “interesting facts” about SWFs, namely that some of them “invest indirectly in domestic industries” and that “they tend to prefer returns over liquidity, thus they have a higher risk tolerance than traditional foreign exchange reserves. Most often SWFs receive their initial capital through “commodity exports, either taxed or owned by the government” or through “transfers of assets from official foreign exchange reserves”.

There are about US$5.1 trillion invested in SWFs globally. About three of every five dollars come from oil and gas exports, the remainder from other sources. The size of funds varies from as little as US$300 million for Indonesia to as large as US$664 billion for Norway. Of the 64 SWFs that currently exist, 39 were established since 2000.

Some have argued that the Bangko Sentral is restricted by its charter, RA 7653, the Central Bank Act, from investing in instruments other than Triple-A rated bonds of foreign governments. At the time this law was passed, the problem facing the country was chronic balance of payments deficits. More transfers out rather than in were being made.

The BSP is tasked under the law with maintaining international monetary stability in the country. Part of this according to Article II, Section 64 of the law is “to preserve the international value of the peso and to maintain its convertibility into other freely convertible currencies”.

To maintain such stability, Section 65 says that “the Bangko Sentral shall maintain international reserves adequate to meet any foreseeable net demands on the Bangko Sentral for foreign currencies”. It would have to judge for itself the adequacy of these reserves based on “prospective receipts and payments of foreign exchange by the Philippines”.

Finally, Section 66 lays out the composition of such reserves which it says “may include but shall not be limited to” gold and other assets that took the form of “documents and instruments customarily employed for the international transfer of funds; demand and time deposits in central banks, treasuries and commercial banks abroad; foreign government securities; and foreign notes and coins”.

So why did the central bank governor offer in September of 2011 to purchase Philippine treasury using its dollar reserves given that these notes are not Triple-A rated? Well, he had probably realised as I had back in November 2010 that the Bank already had an adequate supply of reserves to meet international obligations.

Given that the law says nothing about what to do if the Bank were to have more than a sufficient level of reserves we can say that the Bank is sailing in unchartered waters. If the law does not specify what it should do in such a situation, then it should be left to the discretion of its board to decide on how best to deal with it.

Currently, the return on short-term US treasury notes is between 0 and 0.25 per cent, negative in real terms, meaning that the Bank is paying the US government to borrow from its reserves. And the Fed has said that it plans to keep interest rates as low as they are for the foreseeable future until the US unemployment rate goes under 6.5 per cent (it is currently at 7.7 per cent). If the BSP lent its excess reserves to the Philippine government, it would gain a better return and preserve the value of its assets.

Now that we have cleared the financial viability and legality issues, what would be the purpose of a Philippine SWF? The nature and purpose of SWFs are varied, but in the Philippines it might be to do the following (as adapted from the SWF Institute):

  • Protect and stabilise the budget and economy from excess volatility in revenues/exports
  • Diversify our industry sector to make growth more inclusive and robust
  • Earn greater returns than on foreign exchange reserves
  • Assist monetary authorities dissipate unwanted liquidity
  • Increase savings for future generations, or
  • Fund social and economic development.

Given the need to boost productivity and improve competitiveness, addressing the infrastructure backlog would be the most obvious answer. The public-private partnership projects would be a good initial source of demand for funding as these projects are designed to earn a market rate of return for the investor. Another possibility would be for the SWF to enter into joint-ventures with mining firms for the joint-exploration and production of oil and other commodities. This would ensure that we received a larger share of the benefits from such operations.

A third possibility would be to fund innovation through government procurement, business incubators, industry clusters, and competitions aimed at the commercialisation of ideas. Government could serve as a catalyst in the germination of new activity around key areas of specialisation that the country has already exhibited proficiencies in. The expansion of our semiconductor and electronics industry into higher value adding activities could be one priority. The growth of agribusinesses into higher yield crops and again value adding processes could be another. A fourth priority could be the generation of clean technology and renewable energy.

Finally, beyond just the economic, financial, legal and commercial viability, there is the political viability of doing this. Creating a Philippine SWF would be politically astute as it would be seen as the Aquino administration’s unique contribution to the development of the country. The vice president has also expressed his support for the concept of using foreign reserves for development. This means that the measure would have the support of both leaders and their coalition partners in both houses of Congress.

Beyond that, the consensus formed by our leaders would mark the first time a remittance dependent nation’s government deliberately leveraged the income derived from its work force overseas to channel resources into highly productive activity back home. It would be a shift in the development paradigm of such countries and provide a model for them to follow. Just as conditional cash transfers were forged through a consensus among Mexico’s and Brazil’s leaders as a way to alleviate poverty, the Philippine consensus would provide a path for low income households out of poverty and into the middle class by providing jobs to people of low skills through the fruits of their countrymen’s sacrifice overseas.

If we don’t recognise the opportunity that lies before us in this regard, then when our overseas workers return home, all their hard work may come to nothing as their children will then have to go abroad because there would be no jobs left for them here. With the Aquino government’s good governance credentials, it should be able to shape the probity and prudential measures needed to ensure that the SWF is properly managed and its funds transparently and judiciously utilised for public benefit. This would prove that good governance is indeed good economics and that the righteous path can create in the Philippines opportunities not just for some but for all.

Bureau of Treasury— January to September 2010 deficit better than expected

An October 21, 2010 report prepared by the Bureau of Treasury, Department of Finance

via gov.ph

January to September Fiscal Deficit at P 259.8 Billion

Better Than Program by P13.9 Billion


21 October 2010, Manila, Philippines: The January to September fiscal deficit of the National Government reached P259.8 billion, P13.9 billion lower than the programmed ceiling of P273.7 billion. The over performance can be attributed to the P54.2 billion lower spending partly on account of the savings in interest payments due to lower borrowing cost.

Revenue Performance

Revenue collections reached P894.7 billion for the first three quarters. It grew by 7% compared to the same period of last year’s P839.8 billion. The Bureau of Internal Revenue (BIR) and the Bureau of Customs (BOC) registered a growth of 9% and 15%, respectively, for the first three quarters compared to same period last year. Actual collections for the period January to September were recorded at P607.3 billion for BIR and P191.0 billion for BOC. Actual cash collections for BIR and BOC for the period January to September were significantly higher than its levels in 2009. From January to September, cash collections for BIR was at P598.9 billion or 12.0% higher than last year, while cash collections for BOC was at P170.2 billion or 18.0% higher than 2009. Likewise, the Bureau of the Treasury income was recorded at P45.5 billion while other offices, registered an income of P50.9 billion.

Revenue collections reached P91.9 billion for the month of September. Actual collections for the month were recorded at P61.0 billion and P20.2 billion for BIR and BOC, respectively. Bureau of the Treasury income and collections from other offices for the month was recorded at P5.3 billion and P5.4 billion, respectively.

Expenditures

Actual disbursements for the first three quarters amounted to P1,154.5 billion, 7% higher than the comparable disbursements in 2009. Excluding interest payments, total disbursements increased by 8%.  Actual disbursements in September amounted to P123.6 billion.

Primary Surplus/(Deficit)

Netting out the interest payments in the expenditures, the National Government recorded a primary surplus for the month of September amounting to P0.1 billion. Cumulatively, the primary deficit reached to P15.2 billion for January to September.

Fiscal Performance

January to September 2010

(In Billion Pesos)

September

Actual

Percent

Growth

2010/2009

2009 2010
Surplus/(Deficit) (27.5) (31.7) (15.2)
Revenues 100.7 91.9 (8.7)
Cash 97.6 90.0 (7.8)
Non-Cash 3.1 1.9 (37.6)
Expenditures 128.2 123.6 (3.6)
Cash 125.2 121.7 (2.8)
Non-Cash 3.1 1.9 (37.6)
Jan-SeptActual 2010Q1-Q3

Program

Program vs Actual PercentGrowth

2010/2009

2009 2010
Surplus/(Deficit) (237.5) (259.8) (273.7) 13.9 9.4
Revenues 839.8 894.7 935.1 (40.3) 6.5
Cash 796.1 865.5 898.8 (33.3) 8.7
Non-Cash 43.7 29.2 36.2 (7.1) (33.2)
Expenditures 1,077.3 1,154.5 1,208.7 (54.2) 7.2
Cash 1,033.7 1,125.3 1,172.5 (47.2) 8.9
Non-Cash 43.7 29.2 36.2 (7.1) (33.2)

National Government Revenues

January to September 2010

(In Billion Pesos)

Sept

Actual

Percent

Growth

2010/2009

2009 2010
Revenues 100.7 91.9 (8.7)
BIR 56.2 61.0 8.4
Cash 53.8 59.8 11.3
Non-Cash 2.5 1.2 (53.7)
BOC 18.3 20.2 10.8
Cash 17.7 19.5 10.1
Non-Cash 0.6 0.8 32.9
BTr 6.0 5.3 (12.6)
Other Offices 20.2 5.4 (73.1)
Jan-Sept

Actual

2010

Q1-Q3

Program

Program vs Percent

Growth

2010/2009

2009 2010 Actual
Revenues 839.8 894.7 935.1 (40.4) 6.5
BIR 557.0 607.3 620.5 (13.2) 9.0
Cash 534.5 598.9 615.1 (16.2) 12.0
Non-Cash 22.5 8.4 5.5 2.9 (62.5)
BOC 165.4 191.0 210.2 (19.2) 15.5
Cash 144.2 170.2 179.4 (9.2) 18.0
Non-Cash 21.2 20.7 30.8 (10.0) (2.1)
BTr 52.2 45.5 45.2 0.4 (12.8)
Other Offices 65.1 50.9 59.2 (8.3) (21.9)

National Government Expenditures

January-September 2010

(In Billion Pesos)

SeptemberActual PercentGrowth

2010/2009

2009 2010
Expenditures 128.2 123.6 (3.6)
Int. Payments 31.8 31.8 (0.1)
Others 96.4 91.8 (4.8)
Jan-Sept

Actual

2010

Q1-Q3

Program

Program vs Percent

Growth

2010/2009

2009 2010 Actual
Expenditures 1,077.3 1,154.5 1,208.7 (54.2) 7.2
Int. Payments 235.3 244.5 256.0 (11.4) 3.9
Others 842.1 910.0 952.8 (42.8) 8.1

NG Primary Surplus/(Deficit)

January-September 2010

(In Billion Pesos)

SeptemberActual PercentGrowth

2010/2009

2009 2010
Primary Surplus/ (Deficit) 4.3 0.1 (96.8)
Revenues 100.7 91.9 (8.7)
Expenditures (Net of IP) 96.4 91.8 (4.8)
Jan-SeptActual 2010Q1-Q3

Program

Program vs PercentGrowth

2010/2009

2009 2010 Actual
Primary Surplus/ (Deficit) (2.3) (15.2) (17.7) 2.4 576.4
Revenues 839.8 894.7 935.1 (40.4) 6.5
Expenditures (Net of IP) 842.1 910.0 952.8 (42.8) 8.1

Easing hunger in the 3rd quarter 2010

Briefer prepared by the National Economic Development Authority, October 21, 2010

A. Based on the Third Quarter 2010 Social Weather Survey, the proportion of families experiencing involuntary hunger declined to 15.9 percent in September 2010 compared to 21.1 percent in June 2010 and 17.5 percent in September 2009. Some indicators for third quarter 2010 that show the same trends or may have contributed to this easing of hunger are as follows:

1. Data from the July 2010 Labor Force Survey

Source: National Statistics Office

a. Compared to July 2009, employment level, or the number of people who are employed, in July 2010 grew moderately by 2.2 percent to reach 36.3 million from 35.5 million.

b. Net employment creation was higher in July 2010, reaching 777,000 compared to 414,000 in April 2010, although lower than the 915,000 net employment created in July 2009. Note that the Comprehensive Livelihood and Emergency Employment Program (CLEEP) started implementation in May 2009, with CLEEP in most government agencies running until December 2009.

c. In the agriculture sector where majority of the poor are, net employment generation reached 376,00 in July 2010, a rebound from a net employment loss of 803,000 in April 2010 and net employment loss of 162,000 in July 2009.  Employment losses in agriculture were recorded due to typhoons in 2009 and continuing El Nino in first half of 2010.

d. In terms of unemployment rate, this improved to 6.9 percent in July 2010 compared to 8.0 percent in April 2010 and 7.6 percent in July 2009.

2. Minimum wage
Source: National Wages and Productivity Commission, DOLE

Report as of 7 October 2010

Seven regions out of the 17 regions in the country issued wage orders granting increases in minimum wage as follows:

a. National Capital Region (NCR) – Increased minimum wage by P22.00 on May 31, 2010, effective on July 01, 2010;

b. Western Visayas (Region 6) – Increased minimum wage by P15.00 July 19, 2010, effective on August 12, 2010

c. Central Visayas  (Region 7) – Increased minimum wage by P18.00 on August 12, 2010, effective September 1, 2010.

d. Zamboanga Peninsula (Region 9) – Increased minimum wage by P15.00 and integrated the P15.00 COLA to basic pay on August 16, 2010, effective September 9, 2010.

e. Northern Mindanao (Region 10) – The wage order issued on July 23, 2010 integrated the P12.00 COLA to basic pay effective August 22, 2010 and increased minimum wage by P13.00 effective October 1, 2010.

f. Davao Region (Region 11) – Increased minimum wage by P21.00 on July 23, 2010, effective September 1, 2010.

g. Caraga  (Region 13) – Increased minimum wage by P10.00 and integrated the P10.00 COLA to basic pay on July 28, 2010, effective August 25, 2010.

3. Wage Goods

Source: Bureau of Agricultural Statistics, Department of Agriculture

Wage goods generally declined in the third quarter of 2010 compared to the previous quarter.  Prices declined for rice, pork, dressed chicken, bangus, tilapia, and corngrain. [See resource.]

B. In terms of programs, the continuing implementation of the Pantawid Pamilyang Pilipino Program (4Ps) may have also contributed to ease hunger despite the termination of the programs Food-for- School Program and the Tindahan Natin.

source: gov.ph