Editorial

Flexible targets

Year 2009 could be one of the most unpredictable in recent memory insofar as economic forecasting is concerned. Nobody knows for sure how the global credit crunch will play out and how early the United States can extricate itself from its mess.

Nobody can also say how deep the global recession will be and if the world stock markets have reached the bottom. World crude prices have gone down considerably since reaching a peak of over $147 per barrel in July last year, providing a great relief to many nations after inflation surged to very uncomfortable levels. Oil prices lately, however, have surged back to over $40 per barrel, with the Middle East security situation worsening as Israel stepped up its attack on Hamas targets in the Gaza region.

Local economic forecasting, too, has become difficult because of the uncertainty prevailing in the international front. Finance Secretary Margarito Teves conceded last week that there were no hard-and-fast rules adopted in the drawing up of macro-economic assumptions and fiscal targets this year. Every target, Teves says, is flexible because economic assumptions interrelate with each other.

The government, thus, has the flexibility to change several macro-economic assumptions and fiscal targets it used in crafting the 2009 budget, depending on the latest developments and trends here and abroad. Teves cited this year?s higher budget deficit ceiling of P102 billion, which is aimed to accommodate government?s pump-priming efforts. A higher budget deficit, compared with the ceiling of P75 billion in 2008, implies increased borrowings.

?There is no fixed formula on this deficit spending. We have to be sensitive on how it would affect our exchange rate and our interest rates,? he says.

A bigger budget deficit could lead to higher interest payments because of government?s huge debt exposure that now stands at a little over P4 trillion. The country?s principal and interest payments could also bloat if the exchange rate deteriorates.

?We have a large debt and if the exchange rate deteriorates because of the deficit or the unfavorable environment, there will be a large impact on interest payment as well as the debt,? adds Teves.

The uncertainty in the global economy requires prudence on the part of economic policy makers. Such caution, however, must also be weighed against the measures needed to boost the economy to avoid recessionary pressures.