Full Spend Ahead

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The Philippines is embarking on a programme of ramped-up spending, with a new budget allotting a significant amount to infrastructure projects and the government calling on local banks to help provide capital for public works. This move is intended to help stave off any negative effects arising from a possible US recession.

President Gloria Macapagal-Arroyo signed into law the P1.227trn ($29bn) national budget on March 11, including P200bn ($5bn) earmarked for infrastructure projects. "Our central objective to create more jobs and grow our economy is to invest, invest and invest," the president said.

The president had announced in January a broader strategy to increase government spending on infrastructure projects and social programmes in the first half of 2008. The original plan called for 60% of this year's capital outlays, or an estimated P113bn ($2.7bn), to be released in the first three months of the year - a timeline which has since been revised to six months due the delayed release of the 2008 budget. Further funds would then be available as needed depending on the health of the local economy. Government officials hope that this infusion of cash will create jobs, increase domestic demand and ultimately offset the expected losses from decreasing exports to lagging G3 economies.

In another move to get cash flowing, Finance Secretary Margarito Teves told local press on March 7 he would urge Land Bank of the Philippines (LandBank) and Development Bank of the Philippines (DBP) to earmark and fast track at least P20bn ($50m) for loans to local government units (LGUs).

"Clients of LandBank and DBP are usually local government units. The LGUs may use the funds for infrastructure development. This way, they will be able to help in the overall infrastructure programme of the country," Teves told reporters.

These projects include the continuation of the LRT commuter train in Manila; construction of ports and airports in North Luzon; rehabilitation and construction of highways and bridges in Mindanao; as well as irrigation, rural electrification projects and upgrades for hospitals, schools and housing in rural communities across the country.

In the Visayas, a region that the government believes can be developed into a tourism centre, the construction of new airports and the rehabilitation and expansion of existing ones is underway. These include the Santa Barbara Airport in Iloilo and the Bacolod-Silay Airport.

Local economists, regional banks and the regional consensus have endorsed the spending increases promised by the government. Thailand, Hong Kong, Singapore, China, India and most other South-east Asian nations have some sort of fiscal stimulus plan in the pipeline as well.

Uncharacteristically, the International Monetary Fund (IMF) - a body noted for its staunch belief in restrained government spending and small government - recently bestowed its blessing on the government's strategy.

"There's been a long tradition of fiscal frugality in most Asian countries," said Hubert Neiss, the IMF's top official in the region during the 1997-98 financial crisis. "However, at a time when global demand and exports are slowing down, it is important to boost domestic demand, consumption and investment. Asia can afford it."

This last point - affordability - remains up for debate in the Philippines. Many analysts worry that a slowing US economy will result in lower tax inflows, which would ultimately limit the government's ability to sustain higher spending levels. For example, while the annual deficit for 2007 came in at P9.4bn, the lowest in nine years, the government recorded a P22bn deficit for the month of December. The shortfall, up from P6.5bn in the same period the year before, wiped out the P12.6bn surplus that the government had amassed in the first 11 months of 2007.

Despite these figures, government officials are optimistic. They maintain that tax collection is likely to improve in 2008 due to the implementation of the new tax law and an expanding economy.

Announcing the figures for 2007, Teves maintained the government's commitment to balancing this year's budget, but told press, "While we completed 2007 on a budget position far better than the P63bn deficit target, 2008 brings a new set of challenges."

One of the key difficulties facing the government will be how to ramp up spending quickly. The revised timeline for spending in the first half of the year would be a difficult under normal conditions, but may prove particularly tricky in light of a brewing scandal over a government contract that allegedly included over $100m in bribes. The political fallout from this, combined with increased scrutiny of government spending, will almost certainly delay projects and fund disbursements.

Implementation will be the determining factor between success and failure. As tougher times appear to be approaching Asia's economies, speed will be a key factor in determining their ability to weather the storm. The fundamentals of the government's plan are solid, but much work remains to be done.

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