MANILA - Goldman Sachs has added its voice to those forecasting an overshoot of this year’s deficit cap, but the investment bank also sees the Philippines as on the road to recovery.

In a note to clients last week, Goldman Sachs said it expects the country to record a 2009 budget shortfall of 3.5% of gross domestic product (GDP), or roughly P272 billion. This is higher than the official deficit ceiling of P250 billion, or 3.2% of GDP.

"What was of concern was the successive revisions in the government’s fiscal deficit target," it said.

Pressed to stimulate the economy amid declining revenues and a global downturn, the government has targetted increasing budget shortfalls of 1.2%, 2.5%, and finally 3.2% of GDP. Official data released last Friday put the deficit at P210 billion as of August, already 84% of the full-year target.

"With elections nearing, we believe there are upside risks to government expenditures. However, initial signs of improving government revenues due to a nascent growth recovery may help keep the deficit from growing out beyond 4% of GDP," the bank said.

Several international institutions have said the Philippines could breach the current deficit target, among them the Development Bank of Singapore and research provider GlobalSource. Ratings agencies have also weighed in on the issue, saying a deficit slightly in excess of target would not be a problem.

The Philippine economy, Goldman Sachs said, will likely grow by 1.6% this year, near the high end of the government’s 0.8-1.8% forecast. Aside from the pump-priming effect of election spending, migrant worker remittances are also expected to support a recovery in consumer demand.

"We think the Philippines’ growth recovery is on firm footing. OFW (overseas Filipino worker) remittances, the fiscal stimulus and an accommodative monetary policies are likely to be supportive of growth over the rest of 2009 and 2010, as well as a likely return of the Filipino consumer who had switched to a precautionary savings mode," the bank said.

With economic recovery secured, Goldman Sachs expressed confidence over the government’s medium-term fiscal consolidation plan that is aimed at balancing the budget by 2013.

"In the past the consolidation plan has been successful during the 2002-2007 period, and we feel given the global recovery and higher domestic GDP growth, this is likely to be possible again," it said.

The bank also said the Bangko Sentral ng Pilipinas (BSP) was likely to keep policy rates on hold until the second half of next year given a favorable inflation environment. The overnight borrowing rate, or the premium paid to banks which park funds at the BSP, currently stands at a record low of 4%.