HONG KONG, November 7, 2003  (STAR) By Des Ferriols Ė The Bangko Sentral ng Pilipinas (BSP) said it may have to increase interest rates or adjust its liquidity reserve requirements if the Arroyo administration misses its deficit target either this year or next year.

BSP Governor Rafael Buenaventura said overshooting the deficit target could result in inflationary pressures that would have to be addressed with tools available to the Monetary Board.

Buenaventura addressed the 7th Annual CEO Forum yesterday where he was awarded the Star of Asia by former US President Bill Clinton. During the forum, Hong Kong businessmen and financial experts expressed concerns that the countryís fiscal position might worsen as the May elections approach.

According to Buenaventura, it is critical for the Arroyo administration to meet its target this year since it is necessary to establish that the fiscal catastrophe in 2002 was not the beginning of a trend.

"If we meet the deficit target this year, there would be good basis to believe that we will meet the target next year," Buenaventura said. "Itís all about perception in the market and the Philippines has to appear able to get a hold of itself."

Buenaventura said meeting the fiscal target this year, particularly by the deficit target, would prove that if the government could stay within its budget in an election year, it stood better chances of sustaining this effort.

However, should the government slip in the final months of the year, the BSP might have to resort to taking countermeasures such as adjusting interest rates or adjusting the liquidity reserves in order to stave off inflationary pressure, he said.

"We are working with the commitment to stay within the budget targets," Buenaventura said. "There are concerns among analysts here that there would be a sudden rise in expenditures but I assured them that the indications do not point towards that."

The Arroyo administration has said that its austerity measures would remain in place for the remainder of its term in the first quarter of 2004.

Finance Secretary Jose Isidro Camacho said the government would take the same tack that it used this year to build some fiscal headroom early in the year before undertaking a calibrated relaxation of its budget towards the final quarters of 2004.

According to Camacho, the Development Budget Coordinating Committee (DBCC) still has to discuss the particulars of the 2004 budget but he said it is not likely that there would be a relaxation of the budget early in the year.

"We did that in 2002 and thatís where we got into trouble," Camacho said, referring to the front-loading of government expenditures in the first quarter, leaving no room for adjustment for the rest of the year.

"We released over 70 percent of the budget in the first quarter of that year and that proved to be ineffective," he admitted. As a result, the Arroyo administration overshot its deficit target by about P82 billion, reaching P212 billion when it was supposed to reach only P130 billion.

The 2004 budget deficit is expected to reach P198 billion and Camacho said it is critical to meet this target to establish a convincing trend that the Philippines is keeping to its commitment to balance the budget by 2009.

Recovering from its 2002 setback when the deficit was P82 billion more than expected, Camacho said the improvements in the governmentís revenue collections this year as well as the tight reins on spending would enable it to meet its target to reduce the deficit to only 4.2 percent of the gross domestic product (GDP) by 2004.

Reported by: Sol Jose Vanzi

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