RPT-Q+A-Can the Philippines rein in its budget deficit?

(Repeating story first sent on Nov 2)

By Karen Lema

MANILA, Nov 2 (Reuters) - The Philippines looks certain to blow past its budget deficit target this year after the gap swelled to 95 percent of the total in the first nine months. Still, the Finance department is banking on asset sales and improved revenue in the fourth quarter to hit the 2009 deficit target of 250 billion pesos ($5.2 billion), a record amount. The deficit is 3.2 percent of GDP and Manila aims to reduce that to 2.8 percent of GDP in 2010, or 233.4 billion pesos. Following are questions and answers on the Philippines' budget deficit outlook, market reactions and its effect on next year's borrowing plan:

WHAT ARE THE CHANCES FOR ASSET SALES THIS YEAR?

The government has had no success in disposing of assets lined up for sale so far this year. With two months to go to the end of the year, the chances of raising its target of 30 billion pesos in funds from these sales seems slim.

In the latest attempt, no bidders turned up to buy a 103-hectare commercial estate the government had valued at around $279 million. Manila is now attempting a negotiated sale, although analysts say that may result in a lower price tag and stretched out payment terms. [ID:nSP448155]

A plan to sell a 40 percent stake, worth about 11 billion pesos, in oil-and-gas explorer PNOC-Exploration Corp (PEC.PS) (PECB.PS), has a greater chance of success given the recovery in equities, analysts say.

This month, Manila aims to auction off for 3 billion pesos the right to develop a prime property in Fujimi, Japan, currently used as the residence of the Philippine ambassador.

WHAT DOES THE DEBT MARKET THINK?

Local bond prices have already factored in a blow out in the budget. Upward pressure on yields will probably persist due to worries about how the government will fund its expanding budget gap this year and next.

Some analysts said markets would be willing to accept a 2009 budget deficit of 275-285 billion pesos, an overshoot of 25-35 billion, given the tough economic environment.

But the budget gap could hit as much as 350 billion pesos, some economists forecast in a Reuters poll in September and Finance Secretary Margarito Teves said a worst-case scenario would be a deficit of 300 billion pesos. Such scenarios would add fuel to a rise in yields and pressure on the government to plot a course that shows how it will rein in the deficit in the years ahead. [ID:nMAN362569] [ID:nMAN498266]

The yield on government's 10-year benchmark bonds PH10YT=RR has risen by about 51 basis points so far this year.

Markets are worried about next year's budget. Central bank policy rates are set to start rising next year as global growth becomes more apparent, adding to the borrowing costs for one of Asia's largest sovereign debt issuers.

"If the 2010 budget deficit target is revised to a bigger number..., that will be taken negatively," said Jens Lauschke, rates strategist with DBS Bank in Singapore.

Manila is aiming to balance the budget in 2013.