Philippines urges spending after China-like graft chill

Bloomberg

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Benigno Aquino's drive against graft has helped win credit rating upgrades and greater foreign direct investment. Benigno Aquino's drive against graft has helped win credit rating upgrades and greater foreign direct investment.

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The Philippines ended 2014 with its weakest economic report in almost three years as moves to curb graft and check abuse of power at all levels of government deterred public spending. President Benigno Aquino now faces the challenge of convincing officials to unclog the logjam.
China’s anti-corruption crackdown led officials to slash luxury spending and entertainment. In the Philippines, a similar drive saw civil servants delaying projects as varied as rail lines, fishing ports and free chickens for the poor, according to budget officers. About $1.85 billion, or 15 percent of planned state spending, went unused in the third quarter, government data show.
“Officials are now gun shy,” Budget Secretary Butch Abad said in an interview last month. “They take a while before they sign papers, and if there are issues, they would prefer not to proceed. There is an air of uncertainty hanging over our heads.”
The challenge is preventing the fallout from spreading to other sectors of the Southeast Asian nation, as Aquino cleans up the bureaucracy to boost investment and propel expansion beyond the end of his term next year. While the president has turned the Philippines into one of the region’s fastest-rising economies in recent years, growth will probably slow to about 6 percent in 2014 and this year, from more than 7 percent in 2013, Bloomberg surveys show.
“The government is becoming cautious with spending on all fronts,” said Vaninder Singh, an economist at Royal Bank of Scotland Group Plc in Singapore. “We’re seeing a pretty significant impact on the economy.”
Chickens, feed
While officials grapple with stricter disbursement procedures under Aquino’s anti-corruption drive, the president himself is struggling to spend after the nation’s top court last year barred the executive office from using budget savings to finance projects without the approval of lawmakers.

Street vendors wait for customers on an overpass as traffic stands congested in Manila, the Philippines. While the president has turned the Philippines into one of the region’s fastest-rising economies in recent years, growth will probably slow to about 6 percent in 2014 and this year, from more than 7 percent in 2013, Bloomberg surveys show.
After the Supreme Court ruled in July that Aquino’s $3.2-billion stimulus package was illegal because he hadn’t gone through Congress, government projects that were held up include the rehabilitation of two Manila rail lines, 11 fishing ports, sea walls and lighthouses, according to the budget department. They could only proceed after the passage of a supplemental budget in December.
In the northern province of Benguet, officials had placed orders for chickens and feed for a livelihood project when the national budget office called them to stop delivery, according to a budget official familiar with the disbursement process, who asked not to be named because the information isn’t public. The project was suspended until November.
Spending contracts
State spending fell 8 percent in November from a year earlier, government data showed last week. It contracted 2.6 percent in the July-September period from a year earlier, the biggest drop in 14 quarters. Gross domestic product rose 5.3 percent in the third quarter from a year earlier, cooling from a 6.4 percent pace the previous three months.
“There could probably be some spending in the fourth quarter, but it may not be substantial yet,” said Jonathan Ravelas, chief market strategist at BDO Unibank Inc. in Manila, who’s analyzed the Philippine economy for two decades. “For it to create the tailwind in the economy, it should be done in the first half of the year.”
To reduce the opportunity for graft, the budget office introduced closer scrutiny of spending plans and cut the validity of most project approvals to one year from two, according to documents posted on its website.
Short term
Along with stricter state auditing and the July court decision, the new rules have made civil servants reluctant to decide on spending, according to the budget official. Instead, they pass the matter to their superiors and run most decisions by the department’s six-member legal team to protect themselves, the official said.
“Tighter enforcement and increased transparency can slow use of public funds, but it may be very short-term,” said Bart Édes, a director at the Asian Development Bank in Manila. “Substantial gains can be generated from effective action to reduce corruption, including enhanced efficiency in government spending and improved investor confidence.”
Aquino’s drive against graft has helped win credit rating upgrades and greater foreign direct investment. The Philippines climbed to 85 out of 175 economies on Transparency International’s corruption perceptions index last year, from 134 in 2010, when Aquino took office.
Even so, faltering government outlays are weakening the benefit of a consumption boom and the president’s goal of 8.5 percent annual growth by 2016.
Aquino, who is appealing the court’s decision on his stimulus program, has said the ruling runs the risk of “putting our country’s development in a state of paralysis.”
The government is banking on spending to recover this year.
“This is not going to be permanent,” Abad said. “The problem of the chilling effect was most intense in the third and fourth quarters. Next year, we expect spending to go full throttle and pump the economy.”

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