MANILA - The Philippines' breaching of its deficit cap this year should not be a major concern if the shortfall is narrowed as the economy picks up in 2010, ratings firm Standard & Poor’s (S&P) said.

"We expect the fiscal deficit to come in at about 3.5% of GDP (gross domestic product). The fiscal deterioration is largely of a cyclical nature, although as always the inefficiency of the main revenue collecting agencies contributes to it," S&P sovereign analyst Agost Benard told BusinessWorld in an e-mail over the weekend.

"The extent of the fiscal slippage is not likely to be viewed as a big concern by investors if indeed it turns out to be a one off, and revenue collection and the overall deficit will revert to lower levels as the economy recovers and as the new administration takes office."

Official data show a fiscal gap equivalent to 3.5% of GDP is equivalent to P272.83 billion. The official deficit cap is P250 billion, or 3.2% of the GDP. The deficit widened to P266.1 billion as of October, past the full-year cap of P250 billion, due to anemic revenues blamed on too many tax cuts and an economic slump.

Sought for comment, Finance Undersecretary Gil S. Beltran said a shortfall equivalent to 3.5% of the GDP "is possible." "It is within the range of possibility. But we are doing our best to reduce the deficit. We are trying to privatize our assets and we are also pushing revenue collection agencies to do more," he said by phone. "We are not yet giving up on our target. We still have one month to go."

Mr. Benard noted that the huge budget gap was due to pump-priming efforts aimed at supporting the economy amid the downturn. However, he said this may not be the case next year, as economy is expected to improve.

"The economic impact of the expected deficit is not likely to be significant. A key reason for the deficit overrun is that the government is keeping to its spending plans to sustain the stimulus. This is in contrast with previous years, when expenditure was routinely compressed in order to meet deficit targets," Mr. Benard said.

"By next year -- given the low interest rate environment, the continued strength of remittances and the expected recovery in the global economy -- there is unlikely to be much of a need for continued fiscal stimulus, and so the question of being able to ‘bankroll’ it is probably not so pertinent."

Mr. Benard said he does not see a "fundamental deterioration" in the country’s revenue-raising effort, as reflected in its "stable" ratings outlook. A stable outlook signifies no downward or upward pressure on current ratings.

S&P has assigned a "BB-" for the Philippines’ long-term foreign credit, a "BB+" for its local currency rating and "B" for short-term ratings. A "BB" rating is two notches below investment grade. It means an issuer of debt is seen as less vulnerable in the near-term but faces uncertainties. A "B" rating, a notch lower, points to increased vulnerabilities.

Officials have said the shortfall can still fall within the program if four state assets -- the Food Terminal Inc., a 40% stake in the Philippine National Oil Co.-Exploration Corp., a 50-year lease contract of a property in Tokyo, and a sequestered 24% stake in San Miguel Corp. -- are sold. The sale of one asset could limit the deficit to P280 billion. The worst-case scenario is a P300-billion shortfall if none are sold -- a possibility which Finance Secretary Margarito B. Teves has admitted.