Bear and Stearns says balanced budget unlikely

04/11/2008

Global investment bank Bear and Sterns & Co. Inc. does not expect the government to hit a closely-watched balanced budget target this year due to the rising prices of food and fuel imports.

Bear and Stearns said the government hitting the target would be “most unlikely.”

In a report, the bank said rising inflation and higher food and oil prices are hurting the economy.

“The government may end up spending more to subsidize fuel and food prices in 2008,” it said.

March inflation has zoomed to 6.4 percent, a 21-month high, from the previous month’s 5.4 percent while national government deficit as of end-February has totaled to P32.9 billion.

The bank said although “lagging behind” Indonesia’s 8.17 percent inflation by three to four months, reasons for the higher inflation in both countries are the same — higher food and oil prices.

“However, it would also seem that in both cases, the monetary authorities prematurely lowered their policy interest rates, and may face the embarrassing task of raising these rates again in coming months,” it pointed out.

Rising inflation has prompted the Monetary Board (MB), Bangko Sentral ng Pilipinas (BSP) policy-making body, to maintain its key policy rates, close three of the longer-term windows of the special deposit account (SDA) and lower the rates of the remaining three shorter-term tenors due to rising inflation.

Thus, overnight reverse repurchase (RRP) rate is still at five percent and overnight lending rate at seven percent.

But the rate of the one-week SDA was reduced to 5.0625 percent from 5.09375 percent, the two-week to 5.1250 percent from 5.18750 percent and the one-month to 5.1875 percent from 5.25000 percent.

MB is scheduled to hold its next policy meeting on April 24 and the market expects it to tighten the rates due to increasing inflation.

Relatively, the bank said recent price of rice, which is the staple food in the country, “has emerged as a particularly sensitive issue” after the government ordered investigation on rice hoarders and “threatening harsh penalties for such activity.”

Escalating inflation has also hurt the peso, which was among the best performer in the region last year, the bank said.

On the fiscal side, Bear and Stearns said the higher deficit last February at P19 billion from year-ago’s P11 billion is not bad since the government attributed it to higher infrastructure spending.

The report said “typically, the budget position improves in the latter half of the year, when frequent rainstorms and typhoons make it much more difficult to undertake infrastructure projects.”

“The bottom line is that a balanced budget is most unlikely this year,” it said.

But it stressed that a deficit of P50 billion or less “should not be a special problem.”

The country’s current account is foreseen to remain a surplus “continuing the rapid buildup of official foreign-exchange reserves and foreign assets of the commercial banks, with the result that the Philippines is likely to finish the year as a net foreign creditor, not a debtor.” PNA

Back to top

For comments about this website:Webmaster@tribune.net.ph
The Daily Tribune © 2006