The sharp drop in remittances may cause the Philippines' budget deficit to reach as much as P238 billion this year, American banking giant Citigroup said Thursday.

In a report, Citigroup economist Jun Trinidad said the country is likely to book a budget shortfall ranging from P229 billion to P238 billion, or 3 percent of the country's gross domestic product (GDP).

The amount is significantly higher than the company's projection last month of P197 billion, or 2.4 percent of the country's GDP. It is also larger than the government's revised target of P177.2 billion or 2.2 percent of GDP.

Last year, the Philippines only registered a budget deficit of 0.9 percent of GDP or P68.1 billion. According to Trinidad, the sudden swelling of the country's budget shortfall is likely to spook local financial markets.

"Coming off a stable fiscal situation in which the chronic fiscal deficit situation and eventual fiscal collapse was averted, the swing to a large fiscal deficit scenario would certainly spook the local financial market," Trinidad said.

Citigroup saw remittance growth in the country to plunge to as low as $11.4 billion this year, lower than last year's 13.7-percent growth at $16.4 billion. This would translate to a lower contribution between 6.9 and 7.9 percent of GDP this year from a 9.8-percent share of GDP in 2008.

Trinidad said the remittances slump would cut the country's economic growth between 1.4 to 2.2 percent due to the slowdown in consumption. This, in turn, will affect fiscal spending.

"Revenue weakness arising from sharply lower consumption and by extension of GDP growth would take a larger toll on the fiscal side. Whether government would be in a position to cut spending and prioritize fiscal deficit containment rather than growth remains to be seen," Trinidad said.

Total money sent home by Filipinos working abroad only grew 0.1 percent in January at $1.266 billion. It was the lowest growth since January 2004.

Last month, Citigroup predicted a "dramatic slowdown" in the country's remittance inflows at 3 percent this year on the back of job cuts particularly in the United States.